Macro Trends

Telstra rethought

25 Oct 2013 91 month(s) ago

TelstraTelstra has been seen as a defensive stock for some time, in part because of the uncertainty over the NBN and its changed status in the market, and in part because it is high yielding, paying out a high proportion of its profits. But is it a defensive stock, or a company on the cusp of a growth spurt?

TelstraInvestors should be wary when brokers start to sing the praises of a company immediately after there has been an "investors presentation" or, even worse, a "road show". History is littered with examples of the enthusiasm being mistaken. But according to Charlie Aitken (who bizarrely tries to read the body languages of the senior executives; we will leave that to one side), the company is wrongly perceived as a defensive stock. It is really a growth stock that also happens to be offering a high dividend yield.

His argument is that we are entering a digital age; tech boom 2.  That should be a "massive macro tailwind" for Telstra (TLS) in terms of both the volumes of data they carry and the prices they charge for it:

"TLS is going to be allocated a higher P/E (earnings multiple) by the market as it comes around to realising this growth potential. They are also going to be simultaneously adding P/E for the strategic value of their industry leading networks, their growing market share (with lower churn) and earnings growth/dividend growth.

"For FY14 I forecast TLS to generate EPS of 33.7c, up from 30.7c in FY13. Yes, back to back years of +10% EPS Growth from TLS. On the basis of EPS being 33.7c I expect the TLS Board to lift the FY14 annual dividend from 28cff to 30cff. That would maintain a 90% payout ratio.

"On my forecasts at $5.03 TLS is trading on 14.9x FY14 earnings and a prospective FY14 dividend yield of 5.95%ff. EPS growth is forecast @ +10%.

"My 12 month price target on TLS of $6.00 would see TLS trading 17.8x FY14 delivered EPS and a 5.00%ff delivered FY14 yield.

"To put this in context, Wesfarmers trades on 19.5x FY14 and  4.68%ff prospective FY14 yield, while Woolworths trades on 17.6x FY14 and a 4.04%ff FY yield. The interesting aspect of that is TLS will deliver stronger EPS Growth than both WES and WOW in FY14.

"As you all know I’ve been on this positive TLS bandwagon for many years. The stock is now 4.75% of the benchmark ASX200 Index. After chatting with the management team, reading all the slides, running the financial models for the years ahead, I can say I have never had higher conviction in TLS as a company or as a total return investment.

"The last 3 years were the hard part of the TLS investment case, the next three years will be much easier."

At almost 5% of the ASX's market capitalisation, the stock has the power of an oligopoly. And it is high yielding. That should add up to a reasonably low risk play.