These 2 telcos are both up more than 75% in the last 12 months

Which is the better buy — market minnow My Net Fone or M2 Telecommunications?

Two of the fastest growing telecommunications companies available on the ASX are My Net Fone (ASX: MNF) and M2 Telecommunications (ASX: MTU). The former, smaller, company has a market capitalisation of about $85 million. The latter is in comparison a giant; the market currently values it at over $1.1 billion.

However, there are remarkable similarities between the two companies. Both sell internet connections and related services such as VOIP. Both have retail and wholesale divisions.

Both companies have been growing by acquisition. My Net Fone has recently purchased GoTalk, Call Stream and Connexus, while M2 has recently acquired Primus, Eftel and Dodo. As a result, M2 Telecommunications now competes for retail customers against the likes of TPG Telecom (ASX: TPM).

For investors, however, there are some important differences between the companies, the most obvious of which is size. It will simply be more difficult for M2 to continue to generate high returns on investment than it will be for My Net Fone.

My Net Fone is trading on a trailing yield of about 2.5% yield and M2 has a trailing yield of about 3.2%. Because My Net Fone is smaller, it has less power in the market and is arguably vulnerable to its larger competitors. However, it is pleasing to see that the company still has no debt, and this substantially reduces the risks of investing in it. In comparison, M2 has net debt of about $275 million.

I calculate that even with no growth, My Net Fone shares are worth close to $1. Shares currently trade just below $1.40, indicating the market is confident of future growth. An expectation of future growth is also reflected in the share price of M2 Telecommunications. Both companies are almost certain to substantially grow profits in FY2014, as their recent acquisitions make a full year’s contribution and synergies are realised.

In the last few years My Net Fone has generated returns on investment similar to those of M2 Telecommunications in the years 2005-2011. During that period, M2 shares went from around 25c to above $3.

Foolish takeaway

In the last 12 months shareholders of both companies have done very well. In that time, My Net Fone shares have increased in price by 85% and M2 shares have risen 78%. Both companies pay a reasonable dividend and I think both will continue to grow profits. At current prices, however, I prefer My Net Fone.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.

More reading

Motley Fool contributor Claude Walker owns shares in My Net Fone. Find him on Twitter @claudedwalker.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

More on ⏸️ Investing