Telstra Corporation Ltd (ASX: TLS) is a first-class dividend stock.
Make no mistake.
Whilst it's not devoid of growth potential its sheer size and market dominance make it a very reliable dividend payer throughout the market cycle.
Indeed, it probably won't shoot the lights out with double-digit profit growth year-in year-out like its smaller rivals, TPG Telecom Ltd (ASX: TPM) and M2 Group Ltd (ASX: MTU).
However, it should form part of any well-diversified portfolio in order to weather the returns from the infrequent but significant sharemarket crashes which are certain to occur over time.
Here are three reasons why I think Telstra is one of the best dividend stocks on the ASX.
- Telstra generates enviable free cash flows. Anyone who's been into a Telstra shop recently will know the prices of its products (e.g. mobile phones) are more expensive than its rivals. Ultimately consumers are willing to pay up for the superior network coverage and service. This in turn drives profit margins higher, generates strong cash flows and renders dividend payouts more sustainable.
- As I recently noted, Telstra has a big pile of debt – around $15 billion or so. However, Telstra's debt is low-cost and easily covered by cash flows. Cheap debt coupled with higher profit margins (see point one, above) affords Telstra the ability to improve shareholder returns considerably.
- Telstra has a healthy exposure to the long-term trend of rising data usage. Through mobiles, fixed internet, machine-to-machine communication (M2M), healthcare, Asia and networked Serivces; Telstra stands to benefit from the rise of the Internet of Things.
Should you buy Telstra shares?
Telstra shares could fit into almost any portfolio due to its income and modest capital gains potential. However, like all assets, investors must draw a line in the sand to determine a good price to pay.
Currently at $6.15 per share, I believe Telstra is slightly expensive to justify a 'Buy' rating today and therefore investors should hold off buying in until its share price enters a more compelling valuation range.
