A fund manager has revealed that Telstra Corporation Ltd (ASX: TLS) is his team’s biggest current holding.
According to Pengana Capital chief investment officer Rhett Kessler, businesses with “hard assets” would survive best in the face of rising inflation and interest rates.
“We have it as just under 8% of our portfolio,” he told a Pengana investor webinar.
“When you buy Telstra shares, you’re buying the best mobile phone network in the country. And you’re buying a really nice inflation-protection bond from the government.”
Kessler praised the telco’s management for its ability to make painful short-term decisions for the good of its longer-term outlook.
“We think they’ve done a pretty good job, in the face of a very hostile press — and at times becoming the battleground in the political battles between Liberal and Labor parties.”
Telstra charges premium pricing but has low costs
Kessler is attracted to how Telstra can charge more than its rivals, yet has a low cost base due to its economies of scale and market leader role in new technologies like 5G.
“Everyone says Telstra is terrible at everything… But I will put to you that in the last 15 to 20 years they have successfully maintained their 25% premium on pricing,” he said.
“And they are, by far, the lowest-cost producer for [each] gig of data, which must mean they have decent engineers and marketing people.”
Data is the new oxygen
Once a luxury, internet connectivity has now evolved into a utility for Australian homes.
This makes Telstra resistant to economic ups and downs, according to Kessler.
“If any of you have kids, try to remove wi-fi or data from your home — it has become the new oxygen,” he said.
“We think that business is certainly [now] a toilet paper or toothpaste-type business.”
The “material lead” in Telstra’s 5G mobile network over its rivals is a huge advantage, according to the veteran investor.
As is the income coming in from NBN Co, which pays a fee to use Telstra’s old infrastructure.
Telstra’s chunky dividend yield
The Telstra share price closed 0.44% lower on Wednesday, trading at $3.375. It has been as low as $2.66 in the past year.
The Pengana Australian Equities Fund was lucky enough to purchase Telstra shares cheaper than the current level.
Kessler said this meant it currently provides an after-tax cash earnings yield of 7.2%, rising “comfortably” to 9% over the next 3 or 4 years.
“A prospective dividend yield of 5% is certainly not to be sneezed at.”