Are Telstra Corporation Ltd (ASX: TLS) shares ridiculously cheap?
Following their lacklustre performance in 2016, some investors may think they represent good value.
Indeed, against the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), their valuation appears to have become more compelling.
| Telstra | Market (ASX 200) | |
| Price-Earnings Ratio (P/E) | 16x | 16.7x |
| Dividend Yield | 5.6% | 4.2% |
| Price-Book Ratio (P/B) | 4.8x | 1.3x |
As can be seen above, Telstra shares perhaps aren't a bargain, at least relative to the market, due to their modest P/E discount and premium P/B ratio.
However, Telstra shares have many qualities that aren't always captured by conventional valuation metrics. For example, Telstra's dividend history is superb. The company has not lowered its payout once since 2006.
And while competitors like TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) are bringing the fight to Telstra across a number of products, it continues to have excellent economics. Last year, Telstra generated a return on equity of 29%, which is very impressive.
Together with its tax-effective franking credits, it's little wonder Telstra shares are valued equally, if not higher, than the market's average company.
Buy, hold or sell?
At today's prices of $5.50, I'm not a buyer of Telstra shares. Though interest rates are low and Telstra's fully franked dividend yield is very compelling, I'd rather a lower entry point before buying shares, perhaps between $4 and $4.50.
