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Telstra - buy, sell or hold the line?

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by Peter Switzer

There are many questions for the 1.4 million Telstra shareholders as the telco deals with the possible break up of the company. Should you sell? Hold for the dividend? Buy more? But if you do sell, what do you buy?

Government effect

The less successful the Rudd Government is at breaking up Telstra, the higher the share price goes.

This is exactly what happened yesterday when the Senate’s apparent refusal to support the bill resulted in a deferral of debate.

The end-result was 4 cents rise to $3.17 and it has made Bell Direct’s Julia Lee’s call on my program — SWITZER on Sky News Business Channel — last week a great call.

Just when the telco’s price had hit a record closing low of $2.92, she told me that she had never been a buyer of the stock but at these levels and with such a big dividend, it did look like a buy for the first time.

Since that time the important players in the Senate have got in the way of Senator Stephen Conroy’s plan for Telstra and it has been great for the share prices. Ever since he painted his future picture for the company the share price has headed south from a range around $3.30 or so to sub-$3.

Now at $3.17, it might be the time for my questions above to be considered.

Differing views

Letting loose on my program, RBS Morgans’ broker Simon Bond, a Telstra supporter who thinks it is well-placed to compete in a more mobile and online world says he kept buying when the share price hit record lows. Intra-day, the price went to an all-time low of $2.88.

He is a keeper and there have been price targets such as UBS’s of $4 out there but there are plenty of naysayers who argue you should dump the stock.

Steve Johnson from the Intelligent Investor thinks you should cut your losses and go after better companies with better upside potential. He suspects that the eight per cent plus dividend won't last in coming years but I suspect there are at least two years of it left.

He likes rock solid companies such as Woolworths and QBE, which are pretty good dividend payers but have more share price rises in them.

If you do sell, what do you buy?

I also commissioned Bond, to answer my last question.

For those who are thinking about cutting and running from Telstra, Bond thinks the banks — all four of them — are the places to run to. He likes their dividends and their future.

If you don’t need dividends and just want capital growth, he says you can’t go past the top three resource stocks — BHP-Billiton, Rio Tinto and Woodside Petroleum. “These are one, two and three,” he emphasised.

Buffett strategy

What’s my call?

I would not encourage anyone to buy Telstra now. For those holding, you have to realise you are in a speculative stock and I hate being dependent on the decisions of politicians who are trying to save their skins. I do hold Telstra and I do so for the dividend but I know this is not a company I would buy now because, as Warren Buffett always warns — don’t buy something you don’t understand.

Somehow, I think buying an ETF for the S&P/ASX 200 looks a better bet then Telstra but that’s just my guess.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, March 19, 2010