Telstra: How Much Would You Pay?

Telstra Logo

How much would you pay for Australia’s largest telco? Today’s rant looks at Telstra’s performance over the last 10 years and attempts to calculate a fair value for its share price. I will use the fair value calculate to determine when it will be an appropriate time to invest in Telstra.

Let’s dig in…

Telstra’s Performance is Typical

Telstra is your typical telco company. It is large, stable cash cow that doesn’t really have spectacular year on year growth. Below is a data dump of various metrics that paint the picture of Telstra’s performance.

Financial data comes from Commsec Research which is available with a Commsec account. Data is from 22 December 2016.

Growth

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Net profit growth fluctuates a fair bit but top line growth is pretty stable.

Margins

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Impressive operating margins with have been stable over the last 10 years even with the technological switch to mobile connectivity and the nbn program.

Return Metrics

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Solid return on equity which is consistently above 25% even during the GFC.

Dividends

tls_div_record

Solid dividend track record. The dividend growth is lacking however is a minor negative point.

Price to Pay

In terms of valuation, I’m comfortable using my current valuation methodology that I have used on investments such as AAPL and BBY. My valuation approach for these investments is to assume constant zero growth with a reasonable valuation multiple driven by historical and peer comparisons. This valuation approach works well with Telstra because of the stability of its operating performance and long standing dominant position in its industry. Telstra has maintained a long history of strong performance in light of continual changes in technology rendering some of its products and businesses obsolete. It has a track record of shedding these obsolete businesses and successfully invested in new ones over the long run. This provides a level of safety in the assumption that Telstra will continue to be a profitable business in the long term.
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tls_hist_multiple

tls_peer_comp

Source: Bloomberg


Disclose:: I am/we have no positions in TLS, and will not initiate a long position over the next 72 hours.

Disclaimer: : I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it. Please note that all investments carry some risk. You should be aware that the value of your managed investment may not increase as quickly as expected, if at all, or that the value may go down.  I have no business relationship with any company whose stock is mentioned in this article.

Steven