I find the ASX dividend giant Telstra Group Ltd (ASX: TLS) much more appealing than Commonwealth Bank of Australia (ASX: CBA) shares.
Both are the biggest players in their respective industries in Australia, and both earn huge profits for shareholders.
They have a reputation as impressive ASX dividend shares, delivering high levels of passive income for investors. At first glance, Telstra already has an advantage – it currently has a grossed-up dividend yield of 6.4%, compared to 4.9% for CBA shares.
But, in my mind, there's much more to the decision than that.
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Earnings growth above CBA shares
Investing is a long-term endeavour; it's not just about what's happening in the current financial year. Businesses that grow earnings have a great chance of delivering good long-term returns to shareholders.
When I think about the direction of earnings for both Telstra and CBA, I think the telco's outlook is much stronger. Firstly, Telstra is adding many, many thousands of new subscribers every month.
For me, pricing power is the biggest reason for liking Telstra shares over CBA shares.
CBA, and the entire banking industry, is suffering from competition because they all offer roughly the same product, so price becomes a major factor. CBA's net interest margin (NIM) is being challenged. Telstra is the dominant player in the telco space.
The telco recently announced it was increasing its prices for customers, which I believe will help drive profits higher.
UBS forecasts suggest Telstra's net profit could rise by 24% between FY24 and FY26, while CBA's profit is expected to grow by just 3% between FY24 and FY26.
Dividend growth
Profit growth can fund dividend growth. Dividend growth is essential, in my opinion, because it can protect against inflation and can also help us grow our stream of passive income.
UBS expects CBA's dividend in FY26 to be very similar to the FY24 payout.
UBS currently expects Telstra's dividend payout to grow by 16.7% between FY24 and FY26. Meaning that Telstra's yield starts off being bigger, and the dividend could grow faster. The FY26 Telstra grossed-up dividend yield could be 7.75%
Valuation
The Telstra share price is valued at 21.5x FY24's estimated earnings and under 18x FY26's estimated earnings, according to UBS.
The CBA share price is valued at 22.6x FY24's estimated earnings and 22x FY26's estimated earnings.
Telstra is priced on a cheaper earnings multiple, has a larger dividend yield, and is expected to grow more. That's why I'd choose the telco ASX dividend giant over CBA shares.
