Better buy: Telstra Corporation Ltd or TPG Telecom Ltd?

When it comes to investing in one of Australia’s leading telcos the first two names that are likely to come to mind for the majority of investors are Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM).

But which should you invest in today? Well according to analysts at Citi investors should buy TPG Telecom and sell Telstra.

A research note out of the investment bank today reveals that its analysts have initiated coverage on TPG Telecom with a buy rating and a $14.50 price target. Conversely they have downgraded Telstra from neutral to a sell rating and reduced the price target on Telstra’s shares to just $4.50 from $5.72.

The reason for these changes is largely down to its view that TPG Telecom will be better positioned to deal with the changing market dynamics after the NBN rollout evens the competitive landscape for broadband providers.

As a result it expects Telstra’s dividend to come under significant pressure in a few years time, ultimately leading to a substantial cut.

Whilst it is hard to disagree with the view of Citi’s analysts, it is worth remembering that Telstra is busy diversifying its business with key operations in the Asia-Pacific region and also in the healthcare sector.

Whether it will ultimately be enough to offset any declines in its broadband business only time will tell, but Telstra is certainly giving itself a fighting chance by positioning the business well in these markets in my opinion.

Personally, I wouldn’t rush out and sell Telstra’s shares today. But I would suggest rushing out to buy TPG Telecom’s shares. This is a company on the up and I expect it to continue to produce solid earnings growth for many years to come.

The company is lagging behind its competitors considerably in the mobile phone market, although if the much speculated acquisition of Vodafone eventually occurs then TPG Telecom will become a force to be reckoned with in the mobile market. This makes it a buy today in my eyes.

Lastly, before rushing out to make an investment have you checked to see if you have either of these three wealth destroying shares in your portfolio? Each could be harming it right now and they might be best swapped out for TPG Telecom.

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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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