What could happen to Telstra shares if interest rates fall?

On Wednesday, the Australian Bureau of Statistics released the latest inflation data and revealed a lower than expected reading.

According to the release, consumer prices rose a modest 0.6% during the December quarter and 4.1% over the last 12 months.

In light of this, the market is now starting to believe that interest rates could start to fall in the near future.

This could be good news for Telstra Group Ltd (ASX: TLS) shares, which have struggled as interest rates climbed.

That’s because the telco giant is treated like bond proxy by many investors. So, when actual bonds offer yields that are equally as attractive as Telstra’s dividend yield, they will just buy the risk-free bonds instead.

But what might happen if interest rates fall? Will that make Telstra and other ASX telco shares more attractive?

Goldman Sachs thinks that will be the case. While it isn’t overly optimistic on interest rates falling materially any time soon, it does believe that Telstra could benefit when they do.

What is the broker saying about interest rates and Telstra shares?

The broker isn’t expecting interest rates to be cut aggressively but sees scope for a gradual adjustment. It said:

With our local and global economics teams forecasting rate cuts through 2024, alongside 2yr US rates having compressed significantly in recent months, clearly market expectations for interest rates will be both a significant driver of shareholder returns (and potentially earnings) for our TMT coverage through 2024. However we would stress that our global economists believe the market is discounting too much easing at this point, given they remain upbeat on the growth outlook – potentially suggesting a series of gradual adjustment cuts is more likely than an aggressive easing campaign.

This is likely to be good news for Telstra shareholders. It adds:

As recently noted by our strategists, when interest rates started to fall last year, they believed ‘Bond Proxies’ weren’t as expensive as they appeared on face value thanks to more conservative balance sheets and pay-out policies. Hence following their recent underperformance (vs. cyclicals) they see an even stronger case to add to defensive exposures – supporting our positive view on Telstra (Buy).

Goldman currently has a buy rating and $4.65 price target on Telstra’s shares. It is also forecasting fully franked dividends per share of 18 cents in FY 2024, 19 cents in FY 2025, and 20 cents in FY 2026.

The post What could happen to Telstra shares if interest rates fall? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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