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Should you buy Telstra Corporation Ltd or TPG Telecom Ltd shares right now?

The share prices of Australia’s two leading telecommunications companies have delivered contrasting starts to the year.

In one corner you have the stalwart Telstra Corporation Ltd (ASX: TLS), which delivered a disappointing first quarter in 2016 with its shares down over 6% year-to-date.

In the other corner you have challenger and upstart TPG Telecom Ltd (ASX: TPM). Its shareholders will be delighted to have seen the share price climb by over 13% so far in 2016.

Clearly if I were able to turn back the clock to January 1, I would choose to invest in TPG Telecom which has outperformed Telstra by some distance.

But would I do the same now at the start of the second quarter?

I have little doubt that TPG Telecom is a great investment, but if I were to choose just one of these to start an investment in right now it would be Telstra.

TPG Telecom has shown incredibly strong levels of growth in recent years and there is every chance this will continue to be the case. The market certainly expects it and that has been priced into the shares.

They are currently priced at 27 times estimated FY2016 earnings. The reason investors are willing to pay such a premium for the company’s shares is because of the expected earnings growth in the years ahead. According to CommSec, analysts are expecting earnings to grow by 28% per annum for the next two years.

The danger here is that if the company fails to live up to expectations the share price could come crashing down.

Whereas Telstra has a much more reasonable valuation of 15 times estimated FY2016 earnings, which is in line with the market average.

Because of this, I believe Telstra’s shares will outperform TPG Telecom from this point until the end of 2016. Especially when you factor in the estimated fully franked dividend, which is equivalent to a 6% yield.

There is just one concern I have with Telstra at the moment, and that is the recent outages on its mobile network. With almost 17 million mobile subscribers it is the clear market leader. But these outages could potentially be putting that at risk and sending customers straight into the arms of competitors such a TPG Telecom or Amaysim Australia Ltd (ASX: AYS).

I’m sure there will be many investors like myself looking closely at subscriber numbers in its full year results. I have a feeling the company will have come out of it unscathed, and believe this makes an investment in Telstra at the current price a great one.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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