Is it time to hit redial on Telstra?

Co-founder of the Switzer Report
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On 6 August when Telstra (TLS) shares first touched $4.00, I posed the question “is it time to sell”? Telstra shares hit a high of $4.09, then fell to a low of $3.69. As they now nudge $4.00 again, is it time to press redial?

Telstra’s (TLS) share price

Back in August, when I was a little more circumspect about the prospects for Telstra and there were some rumours that they may look to acquire a media company, the recommendation I offered was to ‘hold’ for a portfolio basis or potentially take some profits from a trading perspective.

I’m now in the buy camp – the yield is just too good to ignore!

So what has changed over the past two months?

Firstly, interest rates have fallen – and if you believe the market – they look set to fall further.

More importantly, the guidance provided at Telstra’s annual general meeting (AGM) on Tuesday reconfirms Telstra as a star yield play, with potentially an increase in the dividend in 2014. To quote from the Chairman Catherine Livingstone’s speech:

“I can confirm it is the Board’s intention to pay a fully franked dividend of 28 cents per share in fiscal 2013… For capital management purposes, our framework principle is that the dividend remain fully-franked, and we seek to increase it over time.” 

Telstra’s chief executive David Thodey also reaffirmed guidance for 2013:

  • “Growth to continue;
  • Low single digit total income and EBITDA growth; and
  • Free cashflow between $4.75bn to $5.25bn.”

A yield play

As Telstra’s dividends are fully franked and the excess imputation credits are either refunded to your SMSF in cash, or reduce the tax payable on other assessable income (investment income, concessional contributions), the after-tax yield continues to be very attractive. Even at a Telstra share price of $5.00, the after-tax dividend yield to a fund in accumulation is 6.8% per annum, and 8.0% per annum for a fund in pension.

Telstra’s share price vs after-tax dividend yield

The bottom line

Buy Telstra for yield for your SMSF – you can almost start to think of Telstra shares as akin to a fixed-income bond. Assuming the Telstra Board doesn’t do anything mad like go on the acquisition trail, I think we will see shares reach $4.50 within a few months and over the medium term, a move up towards $5.00 is not out of the question.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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