Which Aussie telco should you buy?

Senior analysts in the telecommunications industry have forecast mobile revenues to rise by $500 million in 2014, which would imply strong share price growth for companies in the sector.

Many companies within the industry outperformed the market last year, including TPG Telecom (ASX: TPM) and iiNet (ASX: IIN), which appreciated by 95% and 39% respectively. Likewise, shares in market heavyweight Telstra (ASX: TLS) gained 17.4% for the year, in addition to their lucrative dividend payments, while Singapore Telecommunications (ASX: SGT), which owns Optus, also grew by 20.7%.

As reliance on smart phones and internet usage continues to grow, so should the revenues of the bigger telcos. Bank of America Merrill Lynch believes that the sector will be driven predominantly by mobile revenue growth, which it anticipates will go from just 1% in 2013 to 3.1% in 2014, which would make total revenue around $16.41 billion.

Investors wanting exposure to the sector have a wide array of options. Telstra is by far the most dominant telco in Australia and will likely continue to tighten its grasp over the industry for years to come. Telstra has been able to steal customers from rivals and improve margins. It offers a trailing fully franked dividend yield of 5.4%, which is likely to improve this year.

Another excellent alternative is M2 Telecommunications (ASX: MTU). Through numerous acquisitions, M2 has strengthened its position in the industry by adding names such as iPrimus and Dodo to its stable. Although its share price has rallied strongly over the last year, an improving macroeconomic outlook should help to boost shares ever higher for 2014 and beyond. Given its growth prospects, the trailing 3.6% fully franked dividend yield is a welcome bonus for investors.

Foolish takeaway

Australia’s telecommunications sector is booming and investors should not look past the strongest names.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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