The telecommunications sector has proven to be one of the most lucrative industries for Australian investors over the past three years. From the top, with Telstra Corporation Ltd (ASX: TLS) right down to small-caps with market capitalisations less than $100 million, they’ve all performed strongly.
Over the past five years, the S&P/ASX Telecomms (INDEXASX: XTJ) (^XTJ) has nearly doubled the return of the S&P/ASX 200 (INDEXASX: XJO) (^AXJO). That’s because the industry has it all. Huge cash flows, big dividends, capital gains and capable management. Here are three telco stocks which I believe hold the greatest long-term prospects for savvy investors.
For growth it’s hard to go past network infrastructure provider Vocus Communications Limited (ASX: VOC). It’s ultra-fast, high performance network extends beyond Australia throughout Asia and to the United States. Although it trades on a trailing price-earnings ratio of 37, earnings and dividend payments are expected to jump significantly in the next few years.
My favourite value play in the sector is M2 Group Ltd (ASX: MTU). M2 is focused on the retail side of the telecommunications market as the owner of brands such as Dodo, Eftel, Primus and Commander. After a largely acquisitive growth period, its debt is now quite high but management recently informed the market that the integration of its operations is proceeding quicker-than-expected and hinted it will once again look to grow the customer base both organically and acquisitively. It trades on a forward PE ratio of 12 and dividend yield of 3.8% fully franked.
It’s hard to go past Telstra as an income play. It’s the envy of its competitors because of its huge network coverage, profit margins, cash flows and market share. In recent years, Telstra has begun to transform itself away from a rigid telecommunications business model to an agile technology and communications giant with exposure to Asian markets. Management will look to grow its regional exposure in coming years with key JV partnerships and other strategic investments. It is forecast to pay a 5.4% dividend in the coming year.
The BEST buy of all