It wasn't all that long ago – March 2011 to be precise – when shares in Telstra Corporation Ltd (ASX: TLS) were trading below $2.65 and paying a 10.5% fully franked dividend (that's 15.1% grossed-up).
Given how reliable its dividend payments were/are, savvy investors could've taken out a loan, serviced the interest payments (tax deductible) with the dividends and received generous franking credits.
When we consider the 117% in share price gains since then, it would've made for a fantastic investment indeed.
What's changed?
Since 2011 Telstra has begun paying dividends out of its current profits (rather than drawing on retained earnings), CEO David Thodey has transformed its terrible customer service reputation, it has discontinued or partly divested troubled businesses, negotiated two NBN deals and has set its sights firmly on Asia.
The macro environment has also provided a significant tailwind for its share price. Most notable has been the fall in interest rates, which has fuelled demand for big dividend stocks.
At $5.76 per share Telstra now trades on a price-earnings ratio of 16, dividend yield of 5.2% fully franked, and price book value of 5.2.
Looking ahead
Mr Thodey recently said he has a goal of deriving one third of Telstra's revenues from Asia by 2020. Its $11 billion in payments from the NBN Co will likely be redirected to the region for infrastructure investments, joint venture (JV) partnerships and acquisitions.
Indeed just yesterday Telstra announced it is in talks to buy subsea cable operator Pacnet. It is rumoured to be worth around $1 billion. Telstra currently has an interest in 20 cable systems and owns 18 data centres.
The potential acquisition has once again highlighted Telstra's focus on replicating its successful experience in local markets, on the world stage.
In Australia Telstra continues to push ahead with its national Wi-Fi rollout, improve its mobile network and widen its competitive advantage. Whilst the relinquishment of its legacy copper cables and pits to the NBN Co could be seen as a loss of a key advantage over competitors, fixed line communication is unlikely to enjoy the success it has in the past. As such, with a superior wireless offering it could forge another, equally profitable, competitive advantage.
Buy, Hold, or Sell?
Given its extremely reliable dividend and ongoing growth in Asia, there's a number of reasons to be bullish on the outlook for Telstra shares. However the market knows this and appears to be pricing its shares accordingly. Therefore this Christmas, I suggest investors either exercise patience and wait for a lower price, or search for other great dividends ideas trading at a cheap price.
