In times past telecommunication shares stood alongside utility companies as rock solid defensive plays.  These sectors had an advantage over their rival defensive shares in consumer discretionary areas since they had no competition.  When times are tough, people still need food, beverages, and cleaning supplies; but they can opt for lower priced brands.  In short, shares in this sector varied in the defensive capabilities they offered to investors.

In the 1980’s Australia introduced competition into the telecommunications sector that altered the landscape.  In last week’s 18 Share Tips column on TheBull, Darren Jackson of Calibre Investments had this to say about Australia’s telecommunications giant, Telstra (TLS):

•    At current levels, Telstra’s dependable fully franked dividend yield is far superior to returns offered on bank deposits. The company is increasing mobile and internet market share in a competitive market. Its full year profit of $3.23 billion for the 12 months to June 30 beat expectations. Certainty is returning to Telstra and the stock is defensive in volatile times.

His comments point to two solid reasons for investing in shares of Telstra.  First, its dividend is better than any vehicle you could find in the world of bank deposits.  And second, the combination of high dividends and increasing market share provides sound defense in uncertain times.

Dividend Yields

Dividends in isolation can lead to an inaccurate picture.  As you know, what is key is the company’s ability to maintain their dividend.  Dividend payments are at the discretion of the company and are largely dependent on earnings.  The following chart compares Telstra’s dividend yield and earnings stability against the ASX and the Telecommunications sector.

  TLS ASX Telecom
Dividend Yield 9.7% 5.2% 5.4%
Earnings Stability 77.4% 51.1% 56.2%

 

Telstra’s dividend yield is impressive.  It is almost twice that of the Telecommunications sector. Earnings stability is equally impressive, which suggests the potential for stability in dividend payments.  Let us look into the past to see if that is true.

Dividend History

Here is a chart of dividends per share (DPS) paid by Telstra going back five years:

  6/07 6/08 6/09 6/10 6/11
DPS (Dividends per Share) 28 cents 28 cents 28 cents  28 cents  28 cents 

Note that Telstra maintained its superior dividend performance through the Great Financial Crisis.  The company has already announced they expect to maintain the 28 cent dividend in fiscal year 2012.

As a final measure of Telstra’s defensive capabilities, we can look to recent share price performance.  Share markets worldwide have had some rough days recently.  In Australia, alarm bells began to sound months ago with falling consumer sentiment and spending.  If you follow the Top Ten Shorted Stocks feature in TheBull’s newsletter, you know more than half are in the retail sector.  

Given that fact, one would assume that TLS should have outperformed the ASX 200 over the past six months, as it attracted investors looking for defensive plays.  Here is a six month share price movement chart:

#FOTO:1268:400#
 
It would appear share market participants as a whole began to invest more heavily in TLS in early May, as several economic indicators here in Australia began to soften.

While it certainly appears Telstra qualifies as a defensive play, there is another reason to consider investing in TLS – growth.  Here is a list of significant acquisitions and events Telstra has undertaken in recent months:

•    On February 1, 2011, Telstra  acquired 100% of Life Events Media Pty Ltd. T
•    On February 28, 2011, Telstra acquired 100% of Reach Asia Limited, Reach Global Holdings Limited and Reach Network Services Korea Limited. In addition, its wholly controlled entity also acquired 100% of Reach Network Services NZ Limited.
•    On March 31, 2011, Telstra acquired 100% of iVision Pty Ltd.
•    In June 2011 Telstra announced an 800 million dollar investment plan to move into cloud computing services for the business market in Australia.  The plan will help organisations in Australia build their businesses around cloud, by providing world-class technology and industry relevant services – encompassing infrastructure, communications, business application integration, business process skills and migration services, via Telstra’s secure, high speed data connection.
•    On 23 June Telstra signed a Conditional Definitive Agreements with NBN (National Broadband Network) Co and the Commonwealth for Telstra’s participation in the rollout of the NBN.
•    On 30 August Accenture (NYSE: ACN) and Telstra announced a new Product Innovation Lab in Melbourne to stgelop cloud computing solutions for customers in Australia and New Zealand.

You can check the TLS website for more information on the early acquisitions, but the most significant growth possibilities on this list are the participation in the National Broadband Network and the entry into cloud computing.

As you probably know, the NBN will be a high speed fibre optic network designed to reach about 90% of all Australian homes.  A state owned company, NBN Co, will run the network and has reached an 11 billion dollar deal to rent Telstra’s existing copper-based infrastructure.  The upgrade cost will be born by the taxpayer while the revenue from sales of the new service will be equally available to TLS and its competitors.

TLS has plans to spend the money for additional expansion in Asia and into internet related business services, like cloud computing.  The deal must be approved by shareholders and already faces opposition from the Australian Competition and Consumer Commission.

The NBN deal presents TLS with significant challenges but also some opportunities.  In essence, the company is spared the cost of upgrading the network while standing to benefit from increased customers and better service.  

The second growth opportunity is more significant – cloud computing.  The pronouncement from futurists would lead one to believe cloud computing will be as revolutionary as the Internet itself.  Others, although still enthusiastic, claim the migration to the cloud will be evolutionary.  

You can find varying descriptions of what cloud computing means but a simple layman’s description would be to think of it as hard drives and servers in the sky.  While it may evolve into much more, the current capability is largely storing your data and some applications on a service provider on the Internet rather than on your own hardware.  If you follow tech stocks at all, you know cloud computing is the trend about which everybody is talking.  The latest announcement from Telstra shows they are getting ready with their new product innovation lab in Melbourne.

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.