Does Australia’s Telstra have any bandwidth left for investors?

Investment Investigator Val Sabulis walks us through Telstra with the Simply Wall St Beta app!

Telstra: Historically a great Dividend Stock

Who are they? Some brief history!

Telstra (TLS) is Australia’s largest telecommunications and data services provider, with 15.8 million mobile services, 7.7 million fixed voice services and 2.8 million retail fixed broadband services at the time of writing.

After a difficult period up to early 2011, Telstra has undergone somewhat of a “transformation” with extensive changes in senior management, marketing, pricing and technology. This has resulted in strong customer growth in the mobile and data segments, offset however by declining traditional landline telephone services. Nevertheless the shares have risen strongly from below $3 in early 2011 to over $5.30 at the time of writing.

The questions now for investors are can this growth be maintained?, and where will that growth come from?

How have they performed in the past? And expectations for the future!

Telstra’s performance over the 5 years up to 2012 has been flat — in other words Telstra’s profits had not increased significantly over that time.

However profit for the full year to June 2013 was up by almost 10%, and a further 14.6% for the full year to June 2014. The 2014 result was ahead of analyst expectations and featured;

• Mobile subscriber growth of 937,000, leading to increased mobile revenues of 5.1%
• Decreased fixed voice revenues of 7.5%, although notably this is the lowest fall in this category in 5 years

Going forward, analysts expectations are for continued modest growth in profits of around 5%. Telstra management itself forecast “low single digit” growth for 2015 forward.

Does Telstra payout Dividends well?

Telstra has historically been a strong dividend payer, having paid dividends of 28c per share since 2007.

For the June 2014 year onwards Telstra also announced that the final dividend was to be increased by 1c per share, and together with a increase in the interim dividend of 0.5c, this brings total dividends to 29.5c per share.

This represents a payout ratio of in excess of 80%.

At this level Telstra’s current dividend yield is 5.59% which is well above the cash savings rate and is in the top quartile of the market.

Is Telstra Worth it?

The intrinsic or “fair” value of Telstra shares is $4.06, which is substantially below the current share price around $5.50. In other words Telstra shares are trading at a substantial premium of 35% to their intrinsic value.

On a positive note, as part of the 2014 results, Telstra also announced a share buyback of approx. $1bn. Assuming that earnings remain steady, a share buyback will increase Earnings per Share and therefore the intrinsic value.

In common with many high yielding stocks, it is likely that part of this premium can be attributed to the dividend yield, with investors willing to pay a premium for yield in the current low interest rate environment.

How’s Telstra’s Financial Health?

Telstra carries a comparatively high level of debt, with a debt to equity ratio in excess of 100%.

However debt is well covered by annual earnings resulting in an acceptable level of “health”. One downside risk however which investors should consider is that if earnings were to decline significantly, Telstra would in all likelihood be forced to reduce its dividend.

Here’s our Verdict!

Telstra has become a favourite with many investors in recent times due to its high dividend and perceived “safety”. The uncertain economic climate and low interest rates have reinforced Telstra’s appeal. However the Telstra share price has run up strongly over the past 18 months and is approaching historical highs. The current share price is well in excess of intrinsic value, and without an obvious growth catalyst, investors should question whether the current share price represents good value going forward.

Want more information about Telstra? — Get full coverage on the Simply Wall St Beta app here!