Is Telstra Corporation Ltd (ASX: TLS) the best telco to own on the ASX? I’m sure its shareholders are hoping that’s the case.
As a reminder, Telstra is Australia’s largest and oldest telecommunications business, having built the first telegraph line in 1854. Today, it provides more than 17 million retail mobile services, nearly 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services. It also has operations stretching across eHealth, network applications and subsea cabling.
Starting in 1997 (until 2006), the Australian Government sold Telstra to Australian investors via the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.
Is Telstra the best ASX telco?
There sure are a lot of other telco options on the ASX like TPG Telecom Ltd (ASX: TPM), Vocus Group Ltd (ASX: VOC), Hutchison Telecommunications (Aus) Ltd (ASX: HTA), Amaysim Australia Ltd (ASX: AYS) and MNF Group Ltd (ASX: MNF). This list doesn’t even include non-ASX competitors like Optus, Aldimobile, Boost Mobile, Lycamobile and so on.
The above list alone could worry Telstra shareholders since that’s a lot of competition.
Arguably the fiercest competitor is TPG Telecom, which is planning to merge with Vodafone Australia, and could make TPG the best telco to own if it goes ahead. TPG is the low-cost leader of the major telcos, so if it merges with Vodafone Australia it will enjoy significant synergies. TPG also won’t need to spend vast amounts of money on mobile infrastructure because it can utilise Vodafone’s mobile network.
Vocus owns a large network of infrastructure cables around Australia and New Zealand, including the newly-installed Australia Singapore Cable (ASC). Demand for data grows every year, which could benefit the owners of cables like Vocus.
MNF Group is a major voice over internet protocol (VoIP) provider. It is trying to get its boomer-focused Pennytel brand off the ground, MNF is expanding into Singapore, its core business is growing well organically and it has predicted 25% profit growth between FY18 and FY20.
Telstra’s claim to potential earnings growth is the future release of 5G which could unlock a whole host of additional technology including automated cars, virtual reality and future smartphone applications. However, the 5G release is still a while away and in the meantime Telstra is facing significant competition from low-cost mobile operators and in the NBN space.
Would I buy Telstra shares today?
The last 12 months of dividends add up to a fully franked yield of 7.7%. This is a very attractive yield compared to other telcos. Of course there’s no guarantee the dividend will stay the same.
Telstra is trading at around 10x its 2018 financial year profit/earnings, which appears cheap. But unless Telstra can grow its earnings the valuation may just stick around this level, meaning I can’t see a catalyst to improve matters unless NBN Co lowers its charges to telcos.
In my opinion, MNF Group, TPG Telecom and Vocus are more likely to deliver better total returns in the next few years.
And in the long run, I believe it’s better to go for growing businesses that can compound wealth for shareholders, such as the two growth stocks in the free report below.
FREE REPORT: 2 Fast Growth ASX Small Caps For 2019
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