Telstra is trading above $4. Is it time to sell?

Co-founder of the Switzer Report
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Telstra (TLS)

With Telstra trading above $4.00, the obvious question to ask is, “is it time to get out?” Picking a ‘top’ can be as dangerous as looking for the ‘bottom’ in the market – so with that obvious caution, here goes.

Some might be surprised I’m even asking this question. The fact is most Telstra shareholders will now be in the money. T1 shareholders paid $3.30, T3 shareholders paid $3.60 and if you bought in the past four years, Telstra is at a multi-year high. (The poor T2 shareholders who paid $7.40 still have a little way to go.)

Since bottoming at $2.55 on 18 November last year (not long after the Future Fund stopped selling), yield conscious investors have made it a one-way bet on the Telstra price as the chart above shows. As at early afternoon today, Telstra was trading at $4.055.

The positives

Let’s start with the reasons why your SMSF should hang on to Telstra.

The first reason is the 28 cent fully franked dividend. In May, Telstra re-affirmed this rate for the current year and the 2013 financial year, holding out the prospect of “increasing it over time”. As the table below shows, at a share price of $4.00, the dividend yield for a fund in accumulation is 8.5% per annum (pa) after tax, and for a fund in pension, 10% pa. Hard to beat

Next, Telstra has abandoned (for the time being) thoughts of becoming a ‘media’ company following market speculation that it may make a bid for Channel 9’s holding company. Let’s hope this idea has been put firmly back in the box, the lid locked and the keys thrown away.

Finally, Telstra has been winning market share in mobiles and broadband, and is seeing increased revenue from network applications and services.

The negatives

Telstra is not a growth story. Total sales revenue in 2007 was $23.7 billion; in 2011, $25 billion – a compound growth rate of just 1.4% pa. Guidance for 2012 is “low single digit”.

Valuations looked a little stretched. According to FNArena, the market consensus price target is $3.51. Telstra is trading on a forecast PE (Price/Earnings) ratio of 13.8-times for the full-year 2012, and 13-times for FY2013. Net debt of around $14 billion sees a gearing ratio of around 54.9%.

Then there are acquisitions. Do you remember Sensis? Reach? Kaz? Keycorp? Some companies just have an appalling track record with acquisitions, and while it’s a different management team under David Thodey, I’m just not ready to believe that a monolith like Telstra has the capabilities to make an acquisition work for shareholders. It should stick to being a utility.

Bottom line

With no foreseeable risk on the dividend, it is pretty hard for an SMSF to sell Telstra at these levels. There will be some profit taking around these levels, and in a more bullish environment, Telstra will lag the general market. It’s too late to buy – and if the Telstra Board is silly enough to get out the chequebook, it would be time to bail.

Telstra is due to update the market with its annual earnings report on Thursday – I will be listening carefully.

Disclosure: The writer and his super fund are Telstra shareholders.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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