Why Telstra shares are a 'low risk' option for investors: broker

Goldman Sachs thinks investors should be buying this telco giant for its defensive earnings.

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Given the current uncertain economic environment, investors may well be on the lookout for low risk ASX shares with defensive qualities.

If you're one of these investors, then you may want to consider Telstra Group Ltd (ASX: TLS) shares.

Australia's largest telco has been tipped as a buy by analysts at Goldman Sachs. And one of the reasons for its bullish view is the company's defensive earnings.

Why Telstra shares could be a top defensive option

Goldman Sachs currently has a buy rating and $4.70 price target on the telco giant's shares.

Based on the current Telstra share price of $4.35, this implies potential upside of 8% for investors from current levels.

In addition, the broker is expecting a fully franked dividend yield of approximately 4% this year and next. This brings the total potential return to approximately 12%.

That's not a bad total return when you consider that Telstra shares are being seen as a defensive option by analysts!

What else is it saying?

Goldman explains its bull thesis. This includes its low risk earnings and the potential for value to be crystalised through asset divestments. It said:

Telstra is the incumbent telecom operator in Australia. We believe the low risk earnings (and dividend) growth that Telstra is delivering across FY22-25, underpinned through its mobile business, is attractive. We also believe that Telstra has a meaningful opportunity to crystalise value through commencing the process to monetize its InfraCo Fixed assets – which we estimate could be worth between A$22-33bn. Although there is some debate around the strategic benefits, we see a strong rationale for monetizing the recurring NBN payment stream, given its inflation linked, long duration cash flows could be worth $14.5bn to $17.9bn, with no loss strategic benefit.

And while the broker acknowledges that Telstra shares are starting to look fully valued on historic numbers, it feels they are worthy of a premium. It adds:

Although at a headline level, Telstra valuation appears relatively full (vs. peers and vs. 10Y yield), we note: (1) Adjusting out NBN recurring payments (a unique asset), Telstra trades at a much more compelling multiple; (2) Although its yield spread is compressed vs. history, when factoring dividend growth this is more attractive. Hence into an uncertain 2023 we rate Telstra Buy.

But every bull thesis isn't without risks. The broker concludes:

Key risks to our view include: (1) higher competition in mobile/fixed from Optus/TPG or from smaller players using the NBN to loss lead, both which would reduce our earnings & dividend growth; (2) disappointing cost out performance, meaning TLS is unable to offset wage cost inflation; (3) unfavorable regulation in fixed & mobile, including NBN pricing; and (4) delays to infrastructure monetisation or lower than expected realised value.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. 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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