Investors often consider blue-chip stocks for their stability and strong dividends. Among Australia's prominent blue chips, Telstra Group Ltd (ASX: TLS) and Fortescue (ASX:FMG) Metals Group Ltd (ASX: FMG) are noteworthy for their large dividends and significant market presence. Here’s a comparison of these two companies based on growth plans, dividend yields, and valuations.
Growth Plans
As a major iron ore miner, Fortescue's profitability is heavily influenced by global commodity prices, which are largely beyond its control. The company’s financial performance is subject to fluctuations in iron ore demand, primarily driven by China’s consumption.
Fortescue has been diversifying its interests, focusing on green energy initiatives such as green hydrogen, green ammonia, and high-performance batteries. However, the company recently scaled back some of its green energy ambitions and announced job cuts. Despite this, Fortescue continues to invest in its mining operations and exploration projects.
Telstra, a leading telecommunications provider in Australia, is focusing on future growth areas such as 5G technology and cybersecurity. The company is also implementing regular price increases to boost revenue, with recent announcements of mobile price hikes for FY25.
Telstra’s growth strategy includes expanding its 5G network and enhancing its cybersecurity services, which are expected to drive earnings growth. Core earnings are further supported by consistent price increases, which could contribute to revenue growth in the coming years.
Dividend Yield
Dividend yield is a key factor for income-focused investors, providing a measure of the cash returns on an investment.
Fortescue typically offers a high dividend yield due to its low earnings multiple and high payout ratio. For FY25, it is projected to pay an annual dividend per share of $1.31, with a grossed-up yield of 9.2%. For FY26, the dividend is expected to be 94 cents per share, translating into a 6.6% yield.
Telstra also provides attractive dividends, though at a lower yield compared to Fortescue. Projected dividends for FY25 are 19 cents per share, representing a 7% grossed-up yield. For FY26, dividends are expected to increase to 20 cents per share, yielding 7.4%.
While Fortescue offers a higher dividend yield, Telstra's dividend is on an upward trajectory, reflecting positive growth prospects.
Valuation
Valuation metrics such as the price/earnings (P/E) ratio can help assess the attractiveness of an investment based on current earnings.
Fortescue's P/E ratio is relatively low, with projected earnings per share (EPS) of $1.95 for FY25 and $1.78 for FY26. This translates into P/E ratios of approximately 10x for FY25 and 11x for FY26. The lower valuation is partly due to ongoing investments in green energy projects and potential fluctuations in iron ore prices.
Telstra’s P/E ratio reflects a higher valuation compared to Fortescue, with estimated EPS of 18.7 cents for FY25 and 20.8 cents for FY26. This suggests a valuation of under 21x for FY25 and under 19x for FY26. The company’s rising core earnings and subscriber growth contribute to its relatively higher valuation.
Telstra appears to be a more attractive option for those seeking growth and stability in the medium term, supported by rising core earnings and an expanding subscriber base. On the other hand, Fortescue might appeal to investors looking for high dividend yields, though its performance is subject to the volatility of commodity prices. If iron ore prices fall to cyclical lows, Fortescue could present a contrarian investment opportunity. However, based on current trends and growth prospects, Telstra may offer a more stable medium-term outlook.