Telstra Corporation Ltd (ASX: TLS) is worth $67 billion, making it the sixth largest company on the S&P/ASX 200 Index (ASX: ^XJO) behind the big 4 banks and BHP Billiton Limited (ASX: BHP).
Telstra's 4.8% weighting on the ASX 200 Index means its share price has a meaningful impact on the broader market. In the past three years, Telstra's performance has tracked the index, implying performance in line with the market.
However, since posting an all-time high of $6.73 in February this year, Telstra's share price has fallen 22% whilst the ASX 200 Index has only lost 12% over the same period.
This relative under-performance, especially compared to listed telecommunications peers M2 Group Ltd (ASX: MTU) and TPG Telecom Ltd (ASX: TPM) (whose shares have beaten the ASX 200 Index), has left the investment community weary of Telstra's prospects. Accordingly, many believe Telstra's best days are behind it with the company now entering an ex-growth phase, placing downward pressure on its shares.
Management changes; but not strategy
Telstra undertook a strategic review of its business units under former CEO David Thodey. The strategic review led to a sale of Sensis — its telephone directory business — and a few Asian assets (Autohome and CSL). The aim was to 'clear the decks' and make way for targeted growth in Asia.
New CEO Andrew Penn has reiterated this plan, using Telstra's massive war chest of cash to seek growth in Asia and fund new capital management strategies for shareholders. Accordingly, Telstra's focus remains on pursuing growth despite the management changes.
However, its share price has diverged from the index since the change in management, with many believing Andrew Penn will not be able to deliver on his promises. Despite the recent disconnect with the ASX 200 Index, I believe Telstra presents compelling value for the following reasons.
Telstra's dividend keeps growing
It's hard to talk about Telstra without mentioning its dividend; the two go hand in hand, s0 that Telstra's semi-annual dividend is no longer seen as a privilege, but a right. Since privatisation in 1996, Telstra has consistently paid a semi-annual fully-franked dividend of 14 cents making it a handy income-producing investment for all investors.
Over the last year, Telstra increased its dividend by 0.5 cents each half, with its latest dividend totalling 15.5 cents. Whilst the rate of growth is unlikely to continue, the current dividend should be maintained meaning at current prices, Telstra yields 8% after-tax credits. With the official cash rate sitting at 2%, and speculation mounting that the Reserve Bank of Australia will cut further next Tuesday, Telstra's yield is one of the last safe-havens left on the market for income dependent investors.
Australia's growth in Self Managed Super Funds (SMSFs), and the tax concessions afforded within them, should see demand for Telstra continue as income-hungry investors buy for its yield (and attached franking credits). Therefore, at current prices, the downside risk appears limited on the basis of its current dividend payout.
It is a network without equal
Whilst the recent decline in share price has left many calling for the end of Telstra's dominance, its position as Australia's flagship telecommunications carrier remains undoubted. It is the unparalleled mobile service provider in Australia and has a ubiquitous brand reputation to match.
Despite increased competition from the likes of TPG, Amaysim Australia Limited (ASX: AYS) and Singtel-Optus, customers are willing to pay a premium for Telstra's service.
This fact is most evident from Telstra's 2015 full year results, where revenue grew 1.2% to $26.6 billion with earnings growing across all segments. Net profit after tax fell 5.8% to $4.3 billion due to one-off profits recognised a year earlier. An increase of 664,000 customers to its mobile network was the standout, indicating Telstra should continue to benefit from mobile growth, making it one company that is not down for the count.
Foolish takeaway
Whilst it is uncertain if Telstra will continue to grow rapidly under new leadership, it is clear that any future initiatives by Andrew Penn should be shareholder friendly.
Alongside its defensive characteristics, Telstra's dividend yield should support its share price in the interim, with further appreciation coming once Andrew Penn demonstrates execution of his promises. Therefore, the under-performance compared to the ASX 200 Index may be temporary, making Telstra a stock that belongs in everyone's portfolio today.
