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Feasting on Telstra

Having Telstra shares in your portfolio these days is a little like visiting your favourite local restaurant where you pretty much know that your usual dish is still on the menu and just as tasty as ever.

The first half profit result announcement from Telstra contained no real surprises with the key ingredients of mobile and broadband growth generously boosting the flavour of the result.

The essence of Telstra today is that these two divisions are providing the momentum and value to the company while the legacy fixed line phone business gradually diminishes.

As the National Broadband Network is progressively built over the next decade (or more), Telstra will receive compensating payments that soften the decline of the old telephone business and boost the cash flow of the company.

The reality of telecommunications today is that customers are substituting their fixed line phones for mobile devices that can access the internet and provide instantaneous information, convenience and communication.

Throw in the rapid advances in smartphone and tablet technology and you have a perfect recipe for increasing customers as well as data usage. And that’s exactly what happened again in this half-year result with a further 607,000 domestic mobile and 85,000 fixed broadband customers signing up to Telstra’s network.

The dependence on Telstra’s mobile network infrastructure is therefore growing quickly so the company is responding by spending aggressively to expand and enhance its capacity. It is quickly becoming a virtuous circle.

Part of that growth requires the acquisition of new spectrum that will be auctioned by the government this year. Telstra’s improving cash flow is well placed to cope with this and still leave room for the Board to consider what to do with the excess.

Telstra’s dividend is set to remain at 28cps this year as the company concentrates on building up its franking credit balance. With a stated preference for increasing the dividend and the capacity to do so as cash flow increases over the next few years, shareholders will be well rewarded for their patience.

Even as the share price has steadily risen to its current level, the gross dividend yield of 8.6% is still comfortably above the general market and almost double what can be attained on a 12-month term deposit.

The market is in no mood to tolerate risky stocks that dish up uncertain earnings and waffly strategy. While earnings growth at Telstra may seem a little pedestrian relative to other stocks, it is delivering a consistent credible message.

Whether you dine in or prefer takeaway, Telstra is a tasty course for investors with an appetite for dividend yield.

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