Why Telstra stock ‘might not be as defensive and safe’ as you think

The Telstra Group Ltd (ASX: TLS) share price has been gathering momentum in the last year as the company’s earnings have started recovering. Its revenue is also climbing and the dividend is growing again. But one expert has suggested Telstra stock may not be as useful an investment pick as it seems.

Wilson Asset Management investment analyst Anna Milne describes the business as a “great defensive company” because everyone pays their phone bill and we “get a lot of utility out of using our phones”.

Then her next comment starts with “however”, so let’s look at why WAM isn’t Telstra’s biggest fan at the moment.

Telstra stock is too popular

Milne said that when an ASX share is considered “very defensive”, it can become crowded and then it’s “not actually as defensive and safe as it may be perceived”.

In other words, a company’s earnings may well hold up during an economic downturn or difficult news event but the trade-off is the Telstra share price can become too expensive. As such, its valuation can be a risk.

Out of a choice of rating Telstra stock as a buy, hold, or sell, Milne decided to call it a hold because it was trading at five-year highs (at the time of her filmed comments on 21 June 2023). We can see that on the chart below.

The WAM analyst noted there have been “a lot of tailwinds” over the last year to 18 months. However, Milne thinks the market is now familiar with those positives and she said she’s “not sure on catalysts near-term”, though it does offer a “good dividend yield“.

Are there good points to consider?

The dividend yield is useful for gauging investment returns as it’s paid to shareholders and doesn’t require the market to send Telstra stock higher.

According to Commsec estimates, Telstra could pay a fully franked dividend yield of 4.2% in FY24, or 6% grossed-up.

It trades on a relatively hefty price/earnings (p/e) ratio – it’s priced at more than 22x FY24’s estimated earnings, using the forecast on Commsec.

But the good news is that the profit is rising, which is supportive for Telstra stock. In the first half of FY23, the telco saw total income growth of 6.4% to $11.6 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 11.4% to $3.9 billion, and earnings per share (EPS) growth of 27.1% to 7.5 cents.

In FY24, Telstra’s annual EPS is estimated to grow by around 14% to 19 cents. Profit growth is a good development.

The company has found some momentum. It now just depends on what the market thinks this current level of growth is worth.

Time will tell whether it can keep rising, but Telstra is doing what it can to impress investors.