Which telecom should you own?

Vodafone has turned up the heat by switching on its 4G network in a bid to attract customers – but will its parent company also attract investors?

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Australia’s telecommunications market has largely been dominated by the two biggest companies, Telstra (ASX: TLS) and Optus, owned by Singapore Telecommunications (AX: SGT). However, new companies are putting up their fists and doing battle with Australia’s biggest companies and the long term upside could be massive.

The risky

Fallen telecommunications companies like Onetel have shown Australians why investing in the industry can be risky. The costs associated with setting up networks, satellites and spectrum licencing can be overwhelming to say the least.

This week, Vodafone, owned by Hutchison Telecommunications Australia (ASX: HTA), flicked on its 4G mobile network after securing its Australian future through a $3.5 billion loan supplied by Australia’s big banks and international institutions. The money will be used to consolidate loans, pay off spectrum licence renewal fees and provide cash for the network expansion.

This may seem to be good news for the company (and it is) but as an investor you’ve got to ask yourself a few questions. Such as: will it attract customers in the short or long term, will the investment pay for itself or will Optus and Telstra’s new network’s diminish any hope Vodafone had in restoring its customer base and reputation? Telstra and Optus have already been operating at the 4G level for some time and have made plans for more sophisticated technology in the near future.

Vodafone’s reputation for service also has to be questioned. The company’s share price took a beating when it failed to deliver any reception to many places throughout the country. Investors will be wise to keep their distance until the company’s share price can echo the effect the of the network upgrade because, at the moment, the downside outweighs the upside.

Less risky, more growth

The bigger market capital a company has, the more safe investors feel when they buy shares. For the year ended 31 December 2012, Vodafone declared a net loss of $393 million whereas Optus, which has a market cap of 5% more, declared EBITDA in its most recent report to be $2.38 billion, despite negative growth in the Australian mobile industry.

In recent times the sector has become more than a three-horse race. iiNet (ASX: IIN) is an internet service provider supporting over 1.7 million broadband, telephony, mobile and IPTV accounts. In the past year the share price has gone through the roof as a result of increased revenue and profit stemming from major expansions. Having recently dropped around 12%, in line with the market, this one definitely deserves a spot on your watchlist.

M2 Telecommunications (ASX: MTU) and TPG Telecom (ASX: TPM) have both also risen tremendously in the past 12 months on the back of healthy results. Both companies appear to be operating at high price to earnings, most likely due to investors placing high expectations on their future growth. We’re unlucky to see a rise in share price like we have recently, but if investors are focused on the horizon these two stocks could be real gems.

No risk, little growth

Telstra’s fully franked dividend and huge market capital sets it head and shoulders above any of its competitors in term of safety and income. However, it’s definitely not without its risks. Telstra’s reputation precedes it, which this can also be harmful to investors.

In recent months Telstra hit five-year highs and analysts believed the sky was the limit, they were wrong. Income investors flocked towards the diminishing dividend yield and caused the company to fall down in dramatic fashion. Since its recent high, the company has fallen over 10%, way beyond the dividend yield those hopeful investors were chasing. However the fall has given a great opportunity to buy one of Australia’s best stocks.

Foolish takeaway

There’s no doubting it, Australia’s telecommunications industry has been booming over the past three years. Long term investors are beginning to realise the potential profits in an information technology future and at the core of this, is our telecom providers. The S&P/ASX200 Telecomms (ASX: XTJ) has risen 70% in the past three years alone. Perhaps it’s time to jump aboard the information superhighway.

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Motley Fool contributor Owen Raszkiewicz does not own shares in any of the companies mentioned in this article.

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