Here's why this broker just upgraded Telstra shares

Bell Potter thinks that recent weakness has created a buying opportunity for investors.

| More on:
A woman with strawberry blonde hair has a huge smile on her face and fist pumps the air having seen good news on her phone.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Telstra Group Ltd (ASX: TLS) shares have been out of form this year.

So much so, they are trading within a whisker of their 52-week low of $3.75.

One leading broker that believes investors should be taking advantage of this weakness is Bell Potter.

What did the broker say about Telstra shares?

In response to recent declines, the broker believes that the company's shares are "starting to look reasonable value."

As a result, it has upgraded them from a hold rating to a buy rating with a $4.25 price target.

Based on its current share price, this implies potential upside of 12% for investors over the next 12 months.

In addition to this upside, the broker is forecasting a growing stream of dividends from the telco giant's shares.

It has pencilled in fully franked dividends per share of 18 cents in FY 2024, 19 cents in FY 2025, and 20 cents in FY 2026. If this proves accurate, it will mean dividend yields of 4.75%, 5%, and 5.3%, respectively.

This means a potential 12-month total return of approximately 17% for any investors buying its shares at current levels.

Lack of catalysts but low risk

Bell Potter acknowledges that there are few potential catalysts to support a re-rating for Telstra shares in the near term. However, it feels Telstra makes up for this with its low risk growth. It explains:

In our view Telstra is starting to look reasonable value trading on an FY25 PE ratio of <20x while the average of other reasonable comps in the S&P/ASX 20 is now c.23x. Admittedly the growth outlook for Telstra is not as good as for some of the comps (e.g. Aristocrat, CSL and Goodman Group all have forecast double digit EPS growth in FY25) but Telstra still has reasonable growth (mid to high single digit forecast EPS growth in FY25) plus a good dividend yield (forecast 5.0% fully franked in FY25) and the option of selling part or all of its Infrastructure business (which in our view would unlock value and drive more of a sum-of-the-parts valuation).

There is perhaps a lack of catalysts to drive a re-rate of the multiple up towards the average of the peers but on the flip side there is little risk in our view of the company not achieving its FY24 guidance which implies or suggests a better H2 result relative to H1.

Motley Fool contributor James Mickleboro has positions in CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Goodman Group. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended CSL and Goodman Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Communication Shares

Communication Shares

Is the Telstra share price too cheap?

Could this be an opportunity calling?

Read more »

A man wearing a colourful shirt holds an old fashioned phone to his ear with a look of curiosity on his face as though he is pondering the answer to a question.
Communication Shares

What are brokers saying about the Telstra share price after this week's update?

Does the telco giant's guidance update change things for investors?

Read more »

A man looking at his laptop and thinking.
Communication Shares

Telstra share price slips amid 2,800 cuts for growth

Australia's biggest telco is setting its sights on improved profitability with this cost-cutting move.

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
Communication Shares

How much could $10,000 invested in Telstra shares be worth next year?

What do analysts think this telco giant's shares could be really worth?

Read more »

A man looking at his laptop and thinking.
Communication Shares

Why is the Aussie Broadband share price slipping on Wednesday?

After opening higher, the Aussie Broadband share price has slipped into the red.

Read more »

Two elderly men laugh together as they take a selfie with a mobile phone with a city scape in the background.
Communication Shares

Why Telstra shares could be dirt cheap in May

Goldman Sachs thinks the telco giant is undervalued at current levels.

Read more »

Ordinary Australians waiting at the bus stop using their phones to trade ASX 200 shares today
Communication Shares

What does the latest 3G news mean for Telstra shares?

Telstra shares aren't budging from their new 52-week lows this week...

Read more »

A man in shirt and tie uses his mobile phone under water.
Communication Shares

The Telstra share price sank 5% in April and is now at 2-year lows. Time to buy?

With the Telstra share price at two-year lows, is now the time to buy the ASX 200 telco?

Read more »