The Telstra Corporation Ltd (ASX: TLS) share price was trading higher today as the broader market, or S&P/ASX 200 (INDEXASX: XJO), trended upwards.
About Telstra
Telstra is our country’s oldest telecommunications business, having built the first telegraph line in 1854. In 2019, it provides more than 17 million retail mobile services, around 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services.
Telstra also has operations in eHealth, network applications and subsea cabling. In 1997 (until 2006), the Government sold Telstra to Australian investors by listing the shares on the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.
50% Of Analysts Could Be Dead Wrong About Telstra
According to a survey by The Wall Street Journal, around 50% of analysts have either a ‘Buy’ or ‘Overweight’ rating on Telstra shares today.
Meaning, the analysts determined the value of Telstra shares to be sufficiently high, relative to the current share price, to justify an investment rating. Curiously, though, the average valuation, which includes the ratings of analysts who are less positive, is just $3.32 — almost the exact same as Telstra’s share price this morning.
That doesn’t sound like great value to me!
It’s not unusual to see analysts’ valuations clustering together like this, especially when you’re looking at blue chips like Telstra, Commonwealth Bank of Austalia (ASX: CBA) or BHP Group Ltd (ASX: BHP).
Why?
These large companies are so well researched that it’s almost impossible for one analyst to get an ‘edge’ over other professional analysts who have the same years of experience, above-average intelligence and the resources and connections of a major investment firm.
That’s why I think DIY investors focused on income should consider the best Exchange Traded Funds (ETFs), rather than focusing on what “sell-side” analysts are saying.
And if you’re focused on shares capable of exceptional long-term growth (and dividends), consider moving further down the market towards promising small cap shares. While smaller, some of these businesses are better run than the blue chips, they’re dominant and dividend-paying. What’s more, there’s likely to be less than a handful of expert analysts researching the business/share at any one time. That’s where bargains are found, in my view.
Conversely, the only time you’ll get a true bargain (e.g. 30% or more undervalued) from a share like Telstra is when the markets have severely dislocated and investors are extremely fearful (e.g. during the GFC). Most investors say they will — but don’t — buy shares at these times.
Buy, Hold or Sell
I covered Telstra shares and its dividend in more detail in this Rask Media article, “Will Telstra’s 5% Dividend Get Cut in 2019?”.
For the record, I wouldn’t buy Telstra shares at this time. It has too much debt and I believe it simply isn’t capable of substantial long-term growth at these prices, even with 5G mobile on its way.
I prefer to buy shares that can offer both growth and dividend income over many years.
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At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
