Would you buy Telstra Corporation Ltd (ASX: TLS) shares for growth?
What about dividends?
How about both?
Indeed, since May 2010 Telstra shares have soared more than 100% and investors have received an additional 50% in dividends.
Coinciding with a fall in official interest rates, Telstra shareholders have not only benefitted from increased demand for reliable dividend stocks but a reinvigorated brand, expansion into Asia and divestments of legacy assets.
However the impressive 150% shareholder return from Telstra over the past five years hasn't been matched by significant growth in earnings per share or dividend increases, as the next graph shows…
Without growing profits to match its share price growth, Telstra's valuation has simply stretched over time.
Now, this isn't necessarily a bad thing. Especially if a company is expected to grow healthily in coming years, a richer valuation can be justified.
Essentially, it means investors are paying for expected growth. This only becomes a problem if said growth doesn't eventuate.
Indeed, with shares in Telstra currently trading at 18x last year's profits, shareholders are likely keying in some significant growth over the coming years.
However, I'd find it difficult to justify a purchase of Telstra stock at today's prices given the likely growth which lays ahead.
For financial year 2015 Telstra itself forecast: "Low single-digit income and EBITDA growth."
Buy, Hold or Sell?
Telstra is aiming to generate 30% of revenues from Asia by 2020 using its strong cash flows from local operations to invest in infrastructure projects across the region.
Whilst this, coupled with modest growth in the Mobiles and NAS divisions within the domestic telecommunications market, bodes well for further profit growth, my advice is for investors to hold off buying Telstra shares until we're afforded a better buying opportunity.
