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Top 3 telecom stocks

Telecommunication stocks have experienced massive gains in share price over recent years, thanks to mergers, acquisitions and a boom in digital content. As more and more people become reliant on mobile phones and the internet, these stocks stand to benefit.

The biggest and arguably the best telco of them all is Telstra (ASX: TLS). In FY13 the company defied investors’ expectations when it increased profit by 12% and grew its number of mobile customers by 1.3 million. This takes the total number of domestic retail customers to 15.1 million. Despite the decommissioning of the its copper network with the arrival of the NBN, the company’s healthy cash flows, modest growth and strong dividend make it an attractive stock for any portfolio. It currently trades on earnings of around 16 and pays a 5.5% fully franked dividend.

A company that has undertaken a number of large acquisitions in the past five years is M2 Telecommunications (ASX: MTU). The acquisitions of Primus telecom, Eftel and Dodo have taken the company from strength to strength. Since its acquisition of Primus in June 2012 the stock has grown over 90% but it might not be over yet. Morningstar predicts EPS to grow from its current 25.3 cents to 55.5 cents in 2015. CEO Geoff Horth said in the most recent half-year report, “M2’s business is well positioned to deliver its 8th consecutive year of growth in earnings per share”. Currently trading on a P/E of 17, it pays a 2.8% fully franked dividend.

Sometimes when a market is fairly valued, good stocks can be hard to find, particularly when they’re cheap. Amcom Telecommunications (ASX: AMM) is a stock that appears expensive on valuation fundamentals but long term growth is what the market is expecting. Its business class IP voice, cloud and managed services are strong businesses with a bright future ahead. In its most recent half-year the company reported 20% NPAT growth, which capped off a decade average of 20% pa growth. Priced at 21 times earnings, little debt and a 2.9% dividend, Amcom is worthy of a spot on this Fool’s watchlist.

Foolish takeaway

Some analyst and market commentators say that Australian equities are fairly priced but there are still bargains to be had. Good companies that pay strong dividends are sometimes worthy of a heavy price because investors who wait for a bargain may not get the opportunity to buy in before it’s run up in price.

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Motley Fool contributor Owen Raszkiewicz owns shares in M2 Telecommunications.

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