Trade idea: Telstra the quasi-bond trade

Telstra (TLS) is becoming the biggest quasi-bond play on the ASX as dividend growth continues to drive buying.

Source: Bloomberg

With the Australian ten-year bond now at parity with the RBA cash rate, the bond market is clearly stating it believes Australian interest rates are heading lower. With Telstra (TLS) offering a very attractive dividend yield with solid growth expected, investors and traders will be looking for yield from their capital investment in TLS.

With TLS uninhibited by commodity slides and banking concerns, it is the standout industrial in a risk-adverse market. Despite forecast of low revenue growth, it’s likely to maintain its dividend policy and release almost 100% of profit to shareholders.

The key stats:

12-month forward PE estimate: 18.7x - which is a premium to historical pricing

Estimated earnings per share in FY15: $0.336 +24.9% year on year

Dividend growth in 2015: 5.36% to $0.31

Net yield: 4.73%, Gross yield: 6.76% - the Australian 10-year bond is currently 2.50%

12-month high $6.27 – 12-month low $4.99

The potential trade:

On a weekly chart, TLS has broken out to the upside as the key resistance line is snapped. Momentum remains very strong as traders position themselves for risk aversion. I see a buying opportunity on any weakness in TLS (buying in a range $6.08 to $6.15). If central banks continue to weaken interest rates over the coming weeks, TLS will see further upside.

I see TLS heading to $6.50 ahead of its earnings release in February. Expectations of strong dividend growth and stable earnings will support the stock. And a better-than-expected dividend will likely see TLS heading to $7 come year-end.

I’d position a stop loss under $6 to mitigate a surprise change in the macro environment, but momentum, macro themes and price action all suggest TLS is a long call.

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