Telstra Corporation Ltd (ASX: TLS), Woolworths Limited and Medibank Private Ltd (ASX: MPL) are three dominant Australian companies, boasting market-leading positions in their respective industries and they currently offer big fully franked dividends.
However knowing whether or not they are a good buy at their current prices can be difficult.
As always, I should note, a 'good buy' in the stock market is not only one which makes a capital gain, but one which creates a positive return and outperforms the broader market – benchmarked by an index like the S&P/ASX200 (Index: ^AXJO) (ASX: XJO), or similar.
With that in mind, here's what I think you can expect from the three aforementioned stocks.
Telstra Corporation has run hard over the past five years as CEO David Thodey sought to revive the company's brand, divest non-core assets and launch its Asian expansion strategy. However, despite boasting a 4.7% fully franked dividend yield, Telstra's share price appears too high to justify an investment today. Whilst it may climb higher throughout 2015 as investors continue their search for yield, I think its share price is unlikely to beat the market over the next 3-5 years.
Woolworths' share price has, on the other hand, underperformed the market considerably over the past five years, climbing just 0.94% versus the ASX200's return of 22.6%. Woolworths' supermarkets have been locked in an intense price war against key rival Coles whilst international competitors, Aldi and Costco, have made inroads into the Australian market. However, in my opinion, fears of slowing growth and the unprofitable Masters home improvement business appear to be overdone. At today's prices it's offering a 4.8% fully franked dividend.
Medibank Private has performed well since its hotly anticipated initial public offering on the ASX in late 2014. Whilst its position as Australia's leading private health insurer bodes well for future earnings growth, its valuation has become very stretched – it currently boasts a price-earnings ratio of 24.5 and price-book ratio of 4.7. Therefore, unless management can continue to strip costs and grow premiums for a number of years, I doubt its share price will outperform the market from here.
A better buy than Medibank…
