One of the first things long-term investors look for in a company is its competitive advantage.
We ask ourselves the following…
Can it set prices? Are its services superior? Do customers keep coming back, no matter what?
If you've been into a Telstra Corporation Ltd (ASX: TLS) store anytime in the past few years, you'd know the answers to all those questions.
People are drawn to the company for a number of reasons. Investors are drawn to its stock for those same reasons, plus some.
Here are three reasons why investors who already hold shares shouldn't sell…
1. Dominance: Telstra dominates the Australian mobiles, pay-tv, fixed data and voice markets. Its huge market share gives it an enormous stream of sticky revenues and enable it to generate huge free cash flows.
2. Dividends: Telstra's high margin products afford it the luxury of taking on larger amounts of debt. At first glance, Telstra's debt-to-equity ratio of 114% might scare some investors away but it's actually good for shareholders because it improves returns, since the interest payments are sufficiently covered by earnings many times over. High debt levels with good levels of interest cover and wide profit margins, enable it to pay a big dividend year-in year-out. At today's price, Telstra shares yield 5.3% fully franked (7.5% grossed-up).
3. Growth: Despite its size, Telstra isn't devoid of growth either. Its International and Network Application Services (NAS) divisions provide long-term opportunities. With cloud computing and unified communications increasing in popularity; coupled with a growing middle-class population in Asia, the telco's future is looking bright.
Buy, Hold, or Sell?
If you already hold shares in Telstra, I think you should keep holding on for the long term and enjoy those biannual dividend payments. However at today's prices, I'm not a buyer of Telstra stock because I believe fair value is well below $5 per share.
