Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) are two great dividend stocks.
There's no denying it.
Over the past five years, Telstra's total annual shareholder return is an impressive 22.4%. Wesfarmers, whilst considerably less, is still an admirable 10.1%.
Their current yields are impressive too, at 4.9% and 5.2%, respectively – fully franked no less!
In terms of their core businesses, both are dominant.
Telstra's fixed line, mobiles, fixed voice and even its pay-tv business, Foxtel, are best in class. The announcement of a nationwide Wi-Fi rollout is also great news, so too is its international expansion into Asia.
Wesfarmers' Coles supermarkets, whilst not as profitable as Woolworths Limited (ASX: WOW), are a close second. Officeworks and Bunnings Warehouse also enjoy strong profitability and are essentially unrivalled in their respective industries.
According to a recent management presentation, every Australian owns at least one garment of clothing from Kmart, which is also owned by Wesfarmers.
Whilst both Telstra and Wesfarmers are diversified, Telstra is less dependent on any one division and has a better geographical spread than Wesfarmers.
Telstra generated 7.7% of revenue offshore, versus Wesfarmers' 2.3% (or less than 0.001% when we exclude New Zealand).
Telstra also has far better margins.
According to my calculations, Wesfarmers achieved a return on equity of 8.95% last year versus Telstra's 32%.
In terms of dividend sustainability, Telstra's current payout ratio is 78%, whereas Wesfarmers pays out around 91% of profits as dividends. Whilst more is needed to gain a truly valuable insight into the sustainability of their payouts, Telstra looks better placed to increase its payout in the short to medium term.
In regards to medium-term future growth prospects, Telstra wins again.
Wesfarmers' Coles business, which accounts for 44% of profit, could be set to experience a squeezing of margins. In addition, whilst profits from Home Improvement and Officeworks could counter some of that fall, the Target, Chemicals, and Resources businesses are also coming under pressure.
Longer term, as alluded to above, the impact of Aldi, Costco and Lidl could force Coles to further cut margins to keep market share, á la Woolworths supermarkets.
Telstra, on the other hand, has a bright long-term outlook with internet data usage set to soar thanks to a rise in machine-to-machine communication, cloud computing, big data and more. Its push into Asia, both organically and acquisitively, is also well timed.
Value
Based on my estimates, fair value for Telstra shares (currently $6.15) is anywhere between $6 and $6.50.
For Wesfarmers (currently $39.89) my theoretical, or intrinsic, value estimate is around $31. Of course, there are many limitations in my analysis and price targets always prove to be wrong sooner or later.
Bottom line
In my opinion, Telstra is the hands down best dividend stock of these two ASX heavyweights. It has superior growth, profitability and yield potential compared to Wesfarmers, and it all comes at a cheaper price.
However, at today's prices, I'm not a buyer of Telstra shares because I like to have a much wider margin of safety (that is, the difference between intrinsic value and market price) to ensure I maximise my chances of making BIG gains.
