The 9% drop in the share price of Telstra Corporation Ltd (ASX:TLS) from a recent one-year high of $6.74 to $6.12 should have investors sitting up and taking notice.
The telco giant remains a perennial favourite holding amongst many self-managed super funds (SMSF) and income-seeking investors due to what is perceived as a not-to-be-missed yield.
Indeed, many medium-term Telstra shareholders are no doubt feeling pretty chuffed with themselves after the 100% run-up in the company's share price over the past four years excluding that juicy dividend!
It certainly is an outstanding capital gain but the real question investors should be asking themselves is – has it been justified?
Consider these facts
For the year ending 30 June 2010, Telstra earned pre-abnormals 31.3 cents per share and paid a dividend totalling 28 cents per share (cps). For the year ending June 2015, Telstra is forecast to earn 33.5 cps and pay dividends totalling 30 cps.
Hardly stellar growth figures to justify the share price growth, so this blue-chip must have been significantly undervalued a few years ago to justify the run up in share price!
The soaring share price also means the stock now trades on a hefty forward price-to-earnings (PE) multiple of 18.2x…oh, but don't forget the 4.9% fully franked yield!
A better alternative
Now I'm not about to stand here and tell you Woolworths Limited (ASX: WOW) is an amazing investment opportunity because it is trading at a two-and-a-half year low, nor am I about to suggest that it's the best place to park your money if you're seeking income, however, I do believe it's a better investment opportunity – inclusive of yield – compared with Telstra.
Warts and All
Despite the well televised competitive threats facing Woolworths' key supermarket business and the worrying situation unfolding within the Masters Home Improvement business, it's not all bad for owners of Woolworths' shares.
Firstly, the losses being experienced at Masters won't last indefinitely. Either the loss making business will be shut down or it will eventually turn a profit. Whether the business will ever turn out to have been a smart strategic decision remains to be seen – with the sunk costs mounting by the day, the hole that management has to claw its way out of keeps getting bigger and profitability alone doesn't guarantee Masters ever achieves an acceptable return on investment.
Secondly, the heightened level of competition does threaten the margins and profitability of Woolworths but more likely than not, Woolworths' supermarket business will remain a highly profitable business even if growth is harder to come by and there is pressure on earnings.
Anything less than dire outcomes for these two situations arguably suggest that the group can maintain earnings somewhere around the $1.90 per share level and pay out a dividend of at least $1.30 per share. With the share price at $28.33, this implies a reasonable PE multiple of 14.9x and a fully franked yield of 4.6%.
