Why is Telstra commanding a high PE at the moment?
Historic PE over 10 years is say 15. The current PE is 26 .
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Answer
Hi Peter,
The reason comes down primarily to the companies performance over the past few years plus the elasticity of the markets appetite for risk/dividends etc. Your correct in that TLS is currently trading on a valuation of ~26x today (however that number drops to 22.6x expected FY24 numbers) after dipping under 10x in the tough market period between 2010-2011. The average PE is 21x over the past 5-years.
- The markets currently driving safe/defensive stocks ever higher as investors fear a looming recession. This market backdrop combined with some rare growth for the Telco and a reliable fully franked yield in excess of 4% has seen investors push the stock and its valuation higher.
- Conversely while the company struggled on a number of fronts between 2015 and 2018 we saw the stock more than halve while the valuation fell from over 15x to again sub 10x – it became a dividend trap to many over this period.
Its important to remember that execution and performance brings a higher multiple, we would argue that TLS today is a very different business to 5-years ago. They now have real opportunities for growth, value can be generated via the sell down of critical infrastructure, and they have ironed out some of the operational issues of the past. While we are more neutral TLS here than outright bullish, we do understand why the multiple has re-rated higher as they delivered on objectives.
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Telstra (TLS) Valuation Ranges – Source Bloomberg
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Telstra (TLS) Valuation Ranges – Source Bloomberg
