Is it too late to buy telco shares?

In 2013 mobile carriers such as Telstra Corporation Ltd (ASX: TLS), SingTel (ASX: SGT) and Vodafone-operator Hutchison Australia (ASX: HTA), comfortably outperformed the broader S&P/ASX200 Index (ASX: XJO) (^AXJO). However, other big telecommunications stocks including TPG Telecom Ltd (ASX: TPM), iiNet Limited (ASX: IIN) and M2 Telecommunications Group Limited (ASX: MTU) were the big winners.

When interest rates began falling heavily last year, the telecommunications sector began to shine. With high dividend yields and attractive long-term prospects, investors saw an opportunity to buy up some great stocks at good prices. However, now that 2014 has begun, many investors are likely to carefully reconsider the prospects of these companies going forward.

Peter Lynch, a famous fund manager and investor, was a pioneer of the strategy “invest in what you know.” He took his everyday interactions with companies as a starting point to opening an investment case, after all a happy customer is likely to spend more money in the long run.

I for one, use my mobile phone a lot more today than I did 12 or 24 months ago. Why? Because faster internet and mobile devices make surfing the web much more convenient and with many more applications and innovations likely to occur in the near future, my use will grow.

Taking that experience into the investment world allows us to safely assume that revenues will continue to grow, especially for the more dominant players. Australia’s telco sector is already competitive and there’s no obvious signs of an overseas giant entering the market.

In The Australian Financial Review, Bank of America Merril Lynch research analyst Sameer Chopra said the whole telco sector was in for further growth in 2014: “We think mobile revenue growth will go from 1 per cent in 2013 to 3.1 per cent in 2014… so that’s $15.92 billion total revenue in 2013, going to $16.41 billion in calendar year 2014.”

Foolish takeaway

Although big name telecommunication stocks have enjoyed a stellar 18 months, there might still be significant upside for shareholders wanting to escape the low interest rate environment offered by term deposits and bank accounts. For new investors entering the market, it’s hard to go past Telstra shares for safety, dividends and steady growth.

Should you buy, sell or hold your Telstra shares?

With its legendary, fully franked 28-cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: "Is It Time to Sell Telstra?"

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

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