The last year has been hugely encouraging for investors in Telstra Corporation Ltd (ASX: TLS), with the teleco seeing its share price rise by 15%. That's well ahead of the ASX's flat performance in the same time period and, looking ahead, Telstra could continue to outperform the wider index.
Income Potential
A key reason for this is the company's income prospects. At a time when monetary policy is set to become ever-looser, Telstra remains one of the favoured income plays on the ASX. And, with it having a dividend yield of 4.8%, it seems likely that demand for the company's shares will increase as interest rates move lower and Aussie investors seek out high-yield shares.
Encouragingly for investors in Telstra, it is forecast to increase dividends per share at an annualised rate of 3.6% during the next two years, which means that Telstra should offer a real-terms increase in shareholder payments over the medium term. And, with the company's dividend coverage ratio set to rise from 1.1 this year to 1.2 next year, its dividends appear to be more sustainable moving forward.
Defensive Attributes
Furthermore, Telstra remains an appealing defensive play, with its business model being relatively robust and consistent. In addition, its beta of 0.5 indicates that its shares should be less volatile than those of the wider index and, at a time when many investors are becoming concerned about the near-term outlook for the ASX, low beta stocks such as Telstra could become increasingly popular.
Growth Potential
Of course, Telstra also offers an appealing growth profile, with it set to benefit from increased consumer confidence resulting from a falling interest rate. Furthermore, Telstra is also diversifying into news sectors, such as e-health care, and also into new regions, such as Asia, which could provide its top and bottom line with a significant stimulus in the medium to long term. In fact, Telstra is aiming to derive around a third of its revenue from Asia by 2020, which provides an indication of how promising its earnings growth profile could be. So, while its bottom line is forecast to fall by 1.2% per annum during the next two years, its performance in future years could act as a positive catalyst on its share price.
Deserved Premium
Clearly, Telstra trades at a significant premium to both the wider index and to the teleco sector, with it having a price to earnings (P/E) ratio of 18.3 versus 15.7 for the ASX and 15.1 for its sector. However, its mix of income and growth potential, as well as its dominant position in the Aussie mobile market and a lucrative $11bn NBN agreement mean that it appears to be worth such a rich valuation. And, while its shares have already doubled in the last five years, there appears to be considerable scope for further gains over the long term.
