Telstra Corporation Ltd

ASX Code: TLS
Security price: $6.29
Industry: Telecommunications
Forecast distribution: 30c per share fully franked
Last April, we said Telstra was a stalwart of local share portfolios but investors should take a fresh look at it as an income stock.
The shares have since rallied 24 per cent from $5.08 to $6.29, and income investors may now be asking whether Telstra is too expensive.
Telstra is highly profitable, so the solid yield will continue to sustain the stock with more cuts to interest rates likely.
With no dividend payment until September, the stock should be accumulated below $6.
Telstra is Australia’s largest telecommunications provider. Its products and services include broadband, mobile and data, in which it mostly has dominant market shares. Its operations are now being rebalanced, with the growth of mobile offsetting the decline in fixed-voice revenue as customers shift from fixed voice telephony such as home phones to mobile and online.
The company’s recent interim results showed the rebalancing is on track, with strong performances. Its mobile business lifted revenue 10 per cent and added 366,000 subscribers, although there is a question mark over how sustainable this growth is. But the company also has a good growth outlook across a range of services, in­cluding cloud computing and unified communications offered by its Network and Application Services division.
Gearing as measured by net debt to equity increased from 75 per cent during the half to 105 per cent as net debt rose $3.7 billion to $14bn and ­equity fell $470 million, largely due to the $1bn share buyback. That gearing is high but financial risk is mitigated by strong, consistent cashflows and the coming NBN compensation payments with a present value of $11bn.
Telstra declared an interim dividend of 15c a share fully franked, up 3.6 per cent on the previous corresponding period but at the lower end of expectations. The full-year payout is forecast to be 30c fully franked, giving a solid yield of 4.8 per cent.
Telstra’s management also indicated its dividend reinvestment plan (DRP) would start again for the first time since 2008, taking effect from the 2015 final dividend. This is disappointing because it increases the number of shares on issue and slows dividend growth.
At $6.29, Telstra is trading slightly above our valuation of $6.08, but the stock’s reputation as a yield play is likely to grow.