The telecommunications sector looks set to continue the stellar run it experienced in the past few years as demand for networked devices and the internet increases.
We are witnessing it every day. With innovations and unimaginable technology entering the palms of our hands, inside cars and even on our wrists. It can be hard to keep pace.
Even developers find it hard to keep up with all the new gadgets and trying to invest in the 'next big thing' has proven to be a dangerous pursuit. However, there is one simple way to take advantage of the information age.
Whether it's Google Inc's (NASDAQ: GOOG) smart glasses or Apple Inc's (NASDAQ: AAPL) latest iPhone, each are connected through the internet. Step in telecommunications stocks.
Telcos give us, the users, access to advanced technologies over the net for a relatively small fee. Imagine what a smart phone would be without the internet – an overpriced calendar, MP3 player and calculator.
In Australia, the biggest providers of the internet have been posting extremely fast paced growth. The biggest and best names include Telstra Corporation Ltd (ASX: TLS), Singapore Telecommunications Ltd (ASX: SGT) Optus, TPG Telecom Ltd (ASX: TPM), M2 Group (ASX: MTU) and iiNET Limited (ASX: IIN).
Source: Google Finance
Each have tracked well in the past few years but with the market for many internet products (such as mobile phones and fixed broadband) now passing saturation point, it has to be asked if the same companies will continue to outperform in coming years. I believe the historical returns of these companies are not indicative of future gains by any means.
For example, I believe TPG's rapid growth, which has seen it increase by some 3,700% in the past five years is not sustainable moving forward. Although its intention to supply highly populated areas (like CBDs) with fibre optic cables and super-fast wireless internet connections is a growth area, I'd prefer to buy M2 Group – the owner of brand names such as Dodo, Primus, Eftel and Commander – than TPG.
By comparison it trades on cheaper multiples, has a better dividend and according to analysts is expected to grow earnings at a faster rate than its peers. Recently the company said it hasn't ruled out acquisitions, but said it's excited for the next wave of growth both inside and outside of the telecommunications sector. It anticipates its energy business will provide an area for consolidation and growth in coming years.
For dominance in mobiles, fixed-internet, business offerings and international expansion it's hard to go past Telstra. It pays the best dividend, could be considered the 'safest' stock and is consistently growing revenues. It recently upped its half-yearly dividend to 14.5 cents for the first time in eight years. Growing free cash flow from increased revenues and businesses that have operating margins of between 35% and 60% will enable the company to continue to remain the dominant force in the industry for many years to come.
Foolish takeaway
Investors may be looking at the run-up in share prices of a number of these companies and be thinking they're expensive. However, a continued runway of innovation in both fixed and wireless devices will see these companies' products remain in demand for many years to come.
