Shares in Australia's biggest telco, Telstra Corporation Ltd (ASX: TLS), closed at $5.12 yesterday. Although slightly above lows of $5 reached back in February, Telstra shares are now on par with the cheapest they've been since early 2013.
Is it a buy?
That depends on what you're after. In terms of reliable dividends, Telstra is looking pretty good with its current yield of 6% that is sustainable from current cash flows. However, as fellow contributor, Tim McArthur, noted in this article, the company's payout ratio is stretched and with increasing capital expenditure as well as a forecast $2 billion hit to earnings at the conclusion of the NBN rollout (within the next 5 years), dividends might not grow in a hurry.
Management is also looking to increase its total gearing (debt burden), which at 44% is below the company's target range of 50%-70%.
On the plus side, Telstra continues to crush its competitors and has maintained its customer turnover and Average Revenue Per User (ARPU) metrics quite well despite marginal declines in these over the past year.
Looking forwards, Telstra is investing heavily in its network as well as in its staff in order to improve productivity as well as reduce customer 'pain points', which will be crucial to maintaining its market share.
There's also the opportunity for expansion into a number of niche and overseas markets, with which Telstra has experienced some success in the past. The company's smaller, faster-growing segments continue to deliver impressive performance.
Given its size though, Telstra will continue to struggle to generate growth and as a younger investor it wouldn't be my first pick when it comes to expanding my portfolio. Below $5 however, the company's reliable cash generation ensures a strong dividend while the low prices allow a margin of safety.
