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Goldman Sachs just added Telstra shares to its conviction buy list

The Telstra Corporation Ltd (ASX: TLS) share price will be one to watch this morning after a leading broker added the telco giant to its coveted conviction list.

What happened?

According to a note out of Goldman Sachs, its analysts have added Telstra to their conviction list with a buy rating and $4.30 price target.

Including dividends, this price target implies a potential total return of ~25% for the company’s shares over the next 12 months.

Why has Goldman added Telstra to its conviction list?

Whilst Goldman Sachs has been bullish on Telstra for some time, its addition to the conviction list is largely on valuation grounds after a recent pullback in its share price.

The broker explained: “With TLS -11% over the last month (vs. ASX200 +1%) despite a solid FY19 result, we see incremental value emerging. This is supported by its 4.5% fully franked yield, with its spread (vs. 10Y AU Bond) having increased materially to 3.42%, > 1 STD above its LTM avg. When combined with GS expectations for a further 50bps of easing in CY19, and our view that there is upside risk to its 16¢ dividend (FCF per share > EPS), we believe its yield will remain supportive.”

“Finally, TLS has also addressed one of our key prior concerns, being the potential impact of NBN Co. in the enterprise market – somewhat de-risking our estimates. Hence we reiterate our Buy on TLS, and add it to the ANZ CL,” the broker added.

Elsewhere in the sector, the broker isn’t overly positive on Telstra’s rivals.

This morning it reiterated its neutral ratings on the shares of Amaysim Australia Ltd (ASX: AYS), TPG Telecom Ltd (ASX: TPM), and Vocus Group Ltd (ASX: VOC), and its sell rating on the shares of New Zealand-based telco Spark New Zealand Ltd (ASX: SPK).

I agree with Goldman Sachs on Telstra and think it would be a great option for investors at the current level along with these top blue chips. As with Telstra, they have also been rated as buys recently.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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