The telecommunications industry is characterised by high profit margins, excellent cash flows and generous dividend yields. That's exactly what Telstra Corporation Ltd (ASX: TLS), M2 Group Ltd (ASX: MTU) and Vocus Communications Limited (ASX: VOC) have on offer today.
However no stock is a buy at any price and investors who've experienced the vicissitudes of the stock market for many years will know patience pays off, in the end.
Telstra, for example, is offering potential investors an excellent dividend yield while interest rates on term deposits and savings accounts continue to be lacklustre. This has resulted in over 80% share price gains in just the past three years.
At current prices however I've grown increasingly uneasy about how much investors may be expecting from the $70 billion company. I think it has a bright future in Asia (through its International division) and in domestic markets. Also the Network Application Services (NAS) division will power earnings higher, over time. However the stock price expects a little too much in my opinion. I'd hold the stock through a market cycle, but I'm not a buyer at today's prices
M2, the owner of Dodo, Primus, Eftel and the Commander brands, is a growing telecommunications company I'd buy before Telstra. Although its most rapid growth is probably behind it, the future looks bright for the company. The short term will probably be characterised by falling debt and modestly increasing earnings and dividends per share. It is trading on a forward price-earnings ratio of 13.2 and dividend yield of 4% fully franked.
Lastly, shareholders in Vocus have enjoyed a fantastic 1,100% run-up in share price over the past five years. Vocus is the owner of high-quality, high-security and high-speed fibre networks throughout Australia and internationally. Analysts are expecting strong earnings per share growth ahead, but the market knows it with shares currently changing hands on a price-book ratio of 3.65 and price to cash flow ratio of 15.
Buy, Hold or Sell?
In my opinion, at current prices M2 is the only good buy. However, investors could do a lot worse than hold any of them in a well-diversified portfolio. Telstra's legendary dividend is hard to pass up, but I believe the margin of safety on the company's shares isn't enough to justify a buy rating.
