Every investment has its pros and cons, and an investment in Telstra Group Ltd (ASX: TLS) shares is no exception.
But what are the reasons supporting an investment and what are the risks in doing so? Let's dig a little deeper.
Pro and cons of buying Telstra shares
Goldman Sachs has been running the rule over the telco giant this year and has named a few things for investors to consider.
In respect to the positives, the broker feels that Telstra's low risk earnings and dividend growth makes it a good option for investors. 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.
In addition, Goldman sees an opportunity for Telstra to realise value in assets via divestments. It said:
We also believe that Telstra has a meaningful medium term opportunity to crystallise value through commencing the process to monetize its InfraCo Fixed assets – which we estimate could be worth between A$22-33bn.
But it doesn't just stop at physical assets. The broker sees an opportunity for Telstra to monetise recurring payments. Goldman explains:
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 of strategic benefit.
The cons
Goldman Sachs acknowledges that Telstra shares are not necessarily cheap and its yield spread is compressed. However, it is willing to overlook this due to its defensive qualities. It said:
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 in an uncertain 2024 we rate Telstra Buy.
There are other risks for investors to consider. These include competition, cost outs, regulations, and lower asset valuations. It explains:
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.
Buy rating
Overall, Goldman Sachs believes the pros outweigh the cons right now and have a buy rating and $4.35 price target on its shares. This implies potential upside of approximately 9% from current levels.
And with the broker forecasting a 19 cents per share fully franked dividend in FY 2025, which equates to a 4.75% dividend yield, the total potential return stretches beyond 14%.
