MENU

Telstra Corporation Ltd, M2 Group Ltd and Vocus Communications Ltd: Should you buy?

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.

However if you want a big dividend stock to buy right now, our top analyst, Scott Phillips, recently identified one cheap but growing ASX stock with a 6.6% grossed-up dividend yield which I think is a STANDOUT buy today. If you're interested in knowing its name, just click on the link below, enter your email address and we'll send you the FREE report on his top dividend stock idea for 2014 - 2015!

"The Motley Fool's Top Dividend Stock for 2014-2015"

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.