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3 ASX telco share ideas

Telstra Corporation Ltd (ASX: TLS) shares, TPG Telecom Ltd (ASX: TPM) shares and Vocus Group Ltd (ASX: VOC) shares are down, but are they out?

Telcos coming back to earth

Globally, telecommunications shares are known for their defensive qualities, which often includes a lower valuation relative to the market. The reason for this is that their businesses and cash flows are very predictable, the industry is competitive and their balance sheets have loads of debt — so they cannot ‘leverage up the balance sheet for growth’.

However, in Australia, our telco companies have grown rapidly because the industry was fragmented with a bunch of small companies and one monolith (Telstra). Up until last year, the valuations of these companies was eye-watering.

However, that has changed…

TLS shares

One look at Telstra leaves you questioning whether its huge dividend is worth the risk. Currently, Telstra shares are tipped to pay a dividend equivalent to 7.1% fully franked. Some thick-skinned investors might even consider using a loan to buy its shares, with the dividends paying off the loan! Not me though.

I think Telstra will continue to pay a decent dividend to shareholders in the next few years. However, I’m concerned that it may fail to grow its profits per share over the longer term. Therefore, if I were to buy Telstra shares, I would want a lower share price.

TPG Telecom

TPG Telecom ticks many boxes for me. The founder-run company is putting the heat on Telstra in the local mobiles market, having successfully competed against it in the home phone and broadband space.

In addition to its local mobile market expansion, TPG Telecom is rolling out its fibre network across Australia and investing in Singapore. While these may be higher-risk strategies, they are compelling long-term projects in my opinion.

Vocus

Vocus is the name behind Dodo, Primus and much more. The Vocus share price has proven to be sensitive to the whims of myopic (short term) focused investors.

Admittedly, Vocus is facing its fair share of risks and a potential takeover offer from private equity firm KKR, which may limit its upside.

However, while it is higher-risk than Telstra and TPG Telecom, I think the recent selloff may have given rise to a decent risk-reward tradeoff in Vocus shares.

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

The Motley Fool Australia owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. 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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