Which Telco should you own?

With many of Australia’s largest telecommunication companies returning record profits the past 12 months, it’s hard to know which ones are poised for even greater gains.

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With many of Australia’s largest telecommunication companies returning record profits the past 12 months, it’s hard to know who has done their dash, is ready to move higher, or is going to collapse.

Telstra Corporation’s (ASX: TLS) legendary dividend has made the shares a fixture in many portfolios, all the while driving its share price upwards. When interest rates dropped, people flocked backed to shares, buying up stocks that were safe but also capable of growing. Telstra has ticked all the boxes, despite increasing 39.1% in the past 12 months, its dividend is strong, and with a 6.10% yield it’ll give investors healthy returns unrivalled by any other telecommunication company.

In addition, it’s also safe. The former state-owned behemoth has a market capital of $57,363 million, making it over 100 times bigger than Hutchison Telecommunications (Australia) (ASX: HTA), the 50% owner of Vodaphone Hutchison Australia. Despite Telstra’s recent gains, the company is still relatively cheap, with a price to earnings ratio of 15.3 and as the biggest beneficiary of the NBN Co’s fibre optic network, Telstra’s potential for growth looks good.

If you’re asked to name the next biggest telecom provider in Australia, many people would probably say Optus, subsidiary of Singapore Telecommunications (ASX: SGT). Like Telstra, Singtel’s last 12 months on the ASX have been prosperous and the company has remained cheap, increasing 19.1% in share but still at a price to earnings ratio of 11.77. Perhaps this could be the next big mover.

Out of credit!

The next company is one that investors have chosen not to own. Over the past 10 years, Hutchison Telecommunications has consistently decreased the value of investors’ portfolios. The last year has been no exception, bringing down portfolios by a hefty 27.5% and it’s not getting better. For the year ended 31 December 2012, the company reported a net loss of $393.5 million, falling from the previous corresponding period by over $225.8 million.

Hutchison credited much of the results to the loss of 443,000 customers, down to 6.6 million. EBITDA decreased a whopping 43% to $177.3 million. We all know successful investing comes from the ability to buy share prices at lows and sell them at peaks, however, even though this share is trading at $0.031 I wouldn’t buy it…  yet. Canning Fok, Chairman of HTA and Managing Director of Hutchison Whampoa, said VHA’s “continuing losses are anticipated in 2013” but “HTAL expects improvements in VHA’s performance through the year and into 2014”.

Where I have my money

After selling Telstra for a healthy profit, many investors would be wandering around, searching for the right spot to download the fastest profits. Three stocks are worthy of a spot on my watchlist.

TPG Telecom (ASX: TPM), iiNET (ASX: IIN), and M2 Telecommunications Group (ASX: MTU) are my favourite telecoms outside of Telstra’s safe reaches. Increasing 89.2%, 96.1%, and 74.5% respectively, the companies have already made their moves, but many are still worthy of growth. M2 has recently began a takeover of Eftel Limited (ASX: EFT) and on Friday announced it has 88.85% of the voting power in the company. Valuing it at $44.1 million, M2 offered $0.3581 a share and hopes the acquisition will help drive growth in the future.

iiNET has consistent broken records and as the country’s second biggest DSL Internet service provider, that’s not easy. That’s why they’ve got my money. For the six months ended December 31, the company reported NPAT up 122% to $32 million, crediting it to increased revenue and the acquisitions of Intermode and TransACT in 2012. Although it has a modest price to earnings ratio of 17.13, M2’s is only 14.85 and together with its growth prospects, the latter might be the one that steals investors from iiNET.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: “Is It Time to Sell Telstra?”

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz own shares in iiNET.

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