The Telstra Corporation Ltd (ASX: TLS) share price quietly continued its merry way towards a better value price on Friday.
Indeed, against a backdrop of a falling S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) shares of Australia's largest telecommunications carrier have continued to slip from $6.50 in August to $5.40 today.
As savvy long-term investors will know, times like these can present sound buying opportunities. Here are five reasons why Telstra is a compelling investment proposition today:
- Dividends. At $5.40, Telstra shares trade at a forecast dividend yield of 5.8% fully franked. That's an enormous 8.3% when we include the benefits of its franking credits.
- Cashed up. At 30 June 2015, Telstra had $1.4 billion of cash on its balance sheet. While that was down on last year, Telstra invested $5.1 billion in capital expenditure before investing a further $1.1 billion for new businesses. Put another way, Telstra spent the equivalent of 70% of the market capitalisation of its closest rival, TPG Telecom Ltd (ASX: TPM), in sustaining its business — in one year. Moreover, Telstra's war chest is growing. Payments from the lucrative NBN Co deal will bolster the $2.1 billion Telstra already makes in annual free cash flow.
- Asian growth. Telstra is embarking on an Asian expansion; a region it hopes will generate one-third of group revenue by 2020. Last year, the company generated just 4.8% of revenue outside Australia. To achieve its goal, Telstra is forming joint-venture (JV) agreements, investing heavily in data and infrastructure assets, and growing its digital offering.
- Fingers in many pies. Telstra is Australia's largest mobile and fixed data provider. However, Telstra is also Australia's largest pay-tv operator, through its Foxtel JV with News Corp (ASX: NWS); Australia's largest fixed data and voice provider; the most dominant eHealth business, and the leading network services provider. Telstra is also seeking to capitalise on the rise of Machine-to-Machine (M2M) communication.
- Valuation. Finally, at $5.40 per share, Telstra's valuation appears far more compelling than it did at $6.50. In my opinion, Telstra shares are well within their fair value range. And it seems analysts agree. According to those polled by the Wall Street Journal, Telstra shares are worth $5.77.
Buy, Hold or Sell?
At $5.40, Telstra is a good buy, but it's not great. While it is undoubtedly a very strong business, I'd like to start building a position in the $66 billion telco at around $5 per share.
And I'll happily wait until it reaches that share price because there are plenty of other compelling dividend stock ideas that are in bargain territory…
