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Which Telco should you own?

No longer are investors torn between the 3 biggest telecommunications providers. Now, there are new companies that have seen rapid growth and offer fully franked dividend yields.

May be worth selling:

Hutchison Telecommunications (ASX: HTA), owner of Vodafone, has rallied in recent months but there is still a big question mark over its long-term prospects. The company is in a similar position to its direct rivals but carries more risk, no dividend and has a very uncertain short and medium term. Therefore, with a downside outweighing the upside, it remains a stock to avoid.

Hold:

Many stocks in the technology space, particularly the internet arena, are tipped to have a bright future ahead. TPG Telecom (ASX: TPM) has been a market favourite in the past year, with investors pushing the price up 97%. At current prices, TPG is quite an expensive stock but with NPAT up 41% for the half year to 31 January 2013, it seems investors can expect a healthy increase in profits come the end of the year.

Singapore Telecommunications (ASX: SGT) is the owner of Optus and competes directly with Telstra on a number of levels. With the stock’s recent price rise, it can considered slightly expensive but offers exposure to Singaporean markets, which represents approximately 34.8% of revenue. Recently, it spent over $1.6 billion in specialised digital advertising, content and entertainment.

It is Southeast Asia’s biggest mobile operator by subscribers and is banking on acquisitions of smaller companies to help drive future growth, with existing market potential slowing. Together with a new multi-band 4G service, 5% dividend and long term investment projects, the company is not exciting but it is healthy.

Telstra (ASX: TLS) is one of Australia’s biggest and best stocks, with a market capitalisation of over $56 billion and a 6.2% fully franked dividend. With a recent correction in its share price, investors will be hoping it drops even further, which will only increase the yield and its potential for growth. Long term, its slow growth rates are leveraged on its dividend but importantly, investors should be keeping an eye on the next election and whether or not the rollout of the NBN continues. Although CEO David Thodey has said the company’s hundred-year-old copper can provide access to faster internet, the $36 billion NBN contract will be more lucrative for the company.

May be worth buying:

Even though iiNet (ASX: IIN) has increased more than 88% in the past year, its dropping share price is enticing to many investors. This was evident yesterday when the stock closed almost 6% higher at the end of trading. Currently supporting 1.7 million broadband, mobile, telephony and IPTV services enables the company to have plenty of room to grow. After reporting a half-year NPAT up 122% to 31 December 2012, investors have realised that iiNet can offer large growth potential. With a good management structure and two very successful acquisitions, investors can be content with the direction of the company. Coupled with its healthy 2.9% fully franked dividend, it sounds too good to be true.

M2 Telecommunications (ASX: MTU) is an independent provider of retail and wholesale telecommunications services to residential and business customers throughout Australian and New Zealand. After increasing NPAT 66% in its first half, the company completed a successful takeover of Eftel and Dodo for $248 million and its smooth integration of Primus Telecom Holdings means that M2 will be better placed to take advantage of the opportunities presented by the NBN.

Foolish takeaway

Buying stocks at the right price is important, but buying good long-term companies is better. Over time, investors looking for growth must expect to have more volatility than those that have larger market caps and higher dividends. Keep an eye on M2 and iiNet — if they drop any further they may become too good to pass up.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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