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Why TPG Telecom Ltd shares could be a better bet than Telstra Corporation Ltd

Credit: Jason Howie

When Telstra Corporation Ltd (ASX: TLS) initially listed on the ASX it soon became the “go to” stock for investors looking for exposure to the telecommunications industry. This made perfect sense given the evolution of the internet and mobile phones and the near monopoly position the company enjoyed across Australia.

In more recent years, Telstra has also been the “go to” stock for investors seeking out large, fully franked dividends.

However for a number of reasons, investors looking for both exposure to the booming demand for data and telecommunication services and for a stock with a healthy dividend could find TPG Telecom Ltd (ASX: TPM) to be the better bet…

Records smashed

In financial year (FY) 2015 TPG Telecom delivered another record result. Revenue grew 31% to $1.3 billion, profits jumped 31% to $224 million and the fully franked dividend was boosted by 24% to 11.5 cents per share.

Organic and acquisitive growth

With a market capitalisation approaching $9 billion, TPG Telecom is the largest-listed domestic telco stock after Telstra.

During 2015, TPG Telecom acquired rival iiNet at an enterprise value of around $1.9 billion. The acquisition created a clear second-tier leader in the industry and added close to 1 million subscribers to the enlarged group.

The catch

An investment in TPG Telecom has achieved a total shareholder return (TSR) over the past 10 years of 30% per annum, in comparison the TSR of Telstra is 11%.

With management forecasting continued organic growth in FY 2016 the outlook for this energetic telco is positive. This stronger growth profile however is arguably all captured within the current share price.

According to consensus data provided by Morningstar, earnings per share (EPS) in FY 2016 are expected to be 40 cents per share (cps). In contrast, Telstra’s EPS is forecast at 35 cps.

Assuming each company achieves these forecasts, TPG Telecom is trading on a FY 2016 price-to-earnings (PE) ratio of 26x compared with a PE of 15.4x for Telstra. There appears to be little room for further upside in the share price of either stock despite the rosier outlook for TPG Telecom.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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