FYI | Jun 26 2018
By Peter Switzer, Switzer Super Report
Does sensible investing tell you should buy Telstra or not?
Last week I again made the case for the banks and dutifully the market re-loved our financial sector, with the CBA up 9.8% since its recent low of $67.22. This was a classic case of when it can be smart to invest in a quality company that has been caught up in a real beating by the market.
I’ve often talked about this strategy in this Report and I’ve had to really assess its reliability following some market mistreatment of my own SWTZ fund.
A subscriber/investor in the fund, Helen, sent me an email complaining about the fund’s performance, which is her right to do. In late February 2017, we listed at $2.50, went as high as $2.63 but not long ago plumbed the depths of $2.42!
I knew the reason behind the fund’s ordinary showing was the Royal Commission, which has bashed the banks and other financial stocks that you’d have to have in a rock solid-designed dividend growth fund.
And returns were also not helped by the quadruple T’s — Telstra, Trump tariffs and Trump tweets.
Telstra is a big chunk of the overall market, and along with the banks, it is a huge dividend payer. But over the past few months, Telstra and the banks combined have been an enormous drag on the S&P/ASX 200 Index. Happily, as someone who created SWTZ to encourage those who were too long Telstra and banks, and who needed diversification with their dividend stocks, we managed to be up close to 5% in the year to March, while the Big 5 stocks — banks plus Telstra — were down double-digit numbers.
True to form, as the banks rebounded, SWTZ climbed to $2.60 on Friday, which at that point means for 16 months we’re up about 10% before franking, which is OK considering what the Big 5 have put us through stock price-wise.
SWTZ was never designed to be a shoot-the-lights out product, but a classic core investment that could be added to, say, an ETF for the Index, such as the iShares Core S&P/ASX 200 ETF (IOZ), and then you could shoot for alpha with individual stocks, managed funds and so on.
A useful strategy
My going long beat-up stocks worked well when BHP headed down toward $14 in 2016. At the time I argued in this Report that if the company’s share price made $20 within three years, $6 on $20 would be a 30% gain, or 10% per annum. Obviously, with the current share price of $33, the gain has surprised me, but it has been a nice surprise. So could Telstra be another BHP waiting to happen?
I suspect the TLS share price won’t go as low as Citi’s guess of $2.30 and maybe Goldman Sachs’ $3.60 is too optimistic, but the consensus guess at $3.23 implies a 17.7% upside.
I know my colleague Paul Rickard’s assessment post-strategy day was negative on the day itself, but he warmed a little to the new Andy Penn story after a day’s reflection.
There are also some negatives about what a split of the company would mean, with some telco experts suggesting the infrastructure spin off company might have some challenges.
The AFR looked at this with the headline: Why Telstra’s big split should raise red flag for investors.
And this is my point: Telstra is more complicated than BHP. It has so many moving parts and too many unknowns.
A legend of the telco industry told me this morning to ask Andy Penn: “What exactly is 5G? And what are the killer businesses that will come out of it?”
He said he was asked the same question by a shareholder about 3G when it arrived so many years back, and he had to admit it threw him. He also admits they never really saw what it could mean for their business.
Against this, BNY Mellon’s infrastructure fund has an exposure to Telstra and when one of its team talked to us at our investment strategy day, he said those seemingly unused 20-something thousand telephone boxes will be a plus for Telstra when 5G arrives!
As I said, TLS has too many unanswered questions compared to BHP in early 2016 and so it’s not as easy a bet. I like the consensus view, and the potential 17% upside, but I know a lot can go wrong in this space compared to boring old commodities, which as we’ve seen can be exciting at times.
I also worry that when I asked WAM’s Geoff Wilson for a company to hold for 10 years, a few months back, he went for TPG! This company is set to be a new challenge to Telstra’s dominance of mobile and it just makes the company’s turnaround so much harder.
I think the dividend will remain attractive in percentage yield and franking terms, but I wouldn’t want my portfolio to have an exposure to this company greater than 5% of my total holdings. It has gone from being a pretty dependable looking stock to being more one for the speculator.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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