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Simple: 3 telco ASX share ideas

Credit: Terence King

Is something bad brewing in the telco industry?

  • Telstra Corporation Ltd (ASX: TLS) share price – down 9% in 6 months
  • TPG Telecom Ltd (ASX: TPM) share price – down 47%
  • Vocus Group Ltd (ASX: VOC) share price – down 40%

Looking that those returns, most people might say the answer to that question is yes.

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However, I’ll propose a different idea.

I think the recent falls in the Telstra, TPG and Vocus share prices is a result of nothing more than the market getting ahead of itself. Sure, there are risks that the price of internet connections is crumbling and the NBN Co is forcing everyone onto a level playing field.

But the reason these companies’ share prices have fallen can be put down to their expensive valuations, in my opinion. That’s all.

Globally, the telecommunications sector is renowned for its defensive qualities — not growth. Most of the reason Vocus and TPG shares have rallied 126% and 307%, respectively, over the past five years, can be put down to their acquisitions. They have bought smaller companies using debt or by issuing shares. I think the Telstra share price has rallied 42% in that time because it has a massive dividend yield — and interest rates have plummeted.

However, there are reasons to remain positive on the outlook for these companies.

Firstly, mobile is extremely profitable. TPG is pushing into mobiles, and abroad into the Singaporean market. Vocus, which owns Dodo and many other brands, also has its eye on bundled services.

I believe Australia’s mobile providers will be exponentially more important to consumers 10 years from now than the NBN Co.

For example, last year, I signed up to TPG’s unlimited internet package for $59.99.

However, less than a year later I’m beginning to think I won’t need to renew my contract next year. For an extra $20 each month with Optus I got a brand-new iPad, 50GB of super-fast 4g data, unlimited streaming from Netflix, Stan and select music stations. That’s not a plug for Optus, I’m just offering a real life example of where the industry might be going.

Admittedly, not everyone wants the best iPad or unlimited streaming and the convenience of being anywhere and using the internet — some people just want a budget package with no perks.

The key risk to my mind is that mobiles could become super-competitive with data limits exploding and prices falling. That would be bad news for Telstra, TPG and others.

Foolish Takeaway

At today’s prices, I think you could do far worse than add these three telco shares to your investing watchlist. Sure, they are not perfect, but they offer big dividends and modest long-term potential.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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