The shares of Telstra Corporation Ltd (ASX: TLS) went ex-dividend this morning and have fallen by 11 cents at the time of writing – equal to the dividend payment.
However, the shares have fallen 30% since this time a year ago, and have almost halved in price in the last 3 years. Telstra used to be (and may still be) a favourite of investors who seek income due to the steady dividend payment, but is the company now of interest to value investors?
The current market capitalisation of Telstra is $41.5 billion, which puts it at a P/E of 11.2 at the current price of $3.38. The average P/E ratio for Telstra over the 10 years to June 30 has been 13.37.
As at June 30 2017, it held $0.94 billion in cash and equivalents, and $14.8 billion in interest bearing debt. This gives it an enterprise value of $55.36 billion at that time.
With the reported EBITDA of $10.97 billion, Telstra has an Enterprise Multiple of 5.03. Generally, anything under 7.5 is considered cheap. However, depreciation is a significant cost given the company's assets. EBIT for the 12 months to June 30 was $6.53 billion, given it an enterprise value to EBIT ratio of 8.47.
Its Acquirers' Multiple (Enterprise Value/Net operating cash flow) is 7.1. I am comfortable buying strong companies anywhere under 10.
Lastly, Telstra has a Sonkin Ratio (a tax-adjusted enterprise multiple) of just over 12, which means you are paying $12 for every dollar of after tax earnings. This is the 16th cheapest on the ASX200.
Therefore, Telstra is 'cheap' at today's price. However, before investing you must consider whether it's a value trap – is the company so bad that it is on a one-way slide downward? After all, Warren Buffett's rule number 1 is 'Don't lose money'.
The company has a lot of assets and has made some investments in its future. The dividend payout ratio has also been above 90%, and although it wouldn't be popular the company can decrease its payout ratio and reinvest in the business. There is already some evidence of this.
While the company holds a lot of debt and its debt to equity is higher than I would be comfortable with, its earnings are 100% cash. Cash interest cover is also acceptable.
Foolish takeaway
At the current share price, Telstra looks relatively cheap. Without knowing what will happen in the future, I believe the price that you're paying for a business is of primary importance. The price at Telstra looks good, and I'd consider buying today.
