Telstra Corporation Ltd & TPG Telecom Ltd: Are these shares good buys?

Source: Telstra presentation

The telecommunications sector has suffered a lot in the last three months. TPG Telecom Ltd (ASX: TPM) is down 42% since July to $7.47 and Telstra Corporation Ltd (ASX: TLS) is down 14% since July to $5.03.

Although this isn’t great news for current shareholders, is it a good time for potential buyers?


Telstra has a huge, juicy grossed up dividend yield of 8.8% – this is much more appealing than the lousy interest rates on term deposits. However, Telstra’s dividend payout ratio was a whopping 98% for FY16. This seems like an unsustainable percentage, how is Telstra supposed to grow if it isn’t retaining any profits to re-invest back into itself?

Even with TPG’s huge drop, it still has a lower grossed up yield of 2.77%. TPG has a much lower payout ratio at 32%, this allows TPG to re-invest much more for future growth.


Telstra is receiving large payments from the government and NBN Co for its copper network and continued work helping NBN Co rollout the NBN.

TPG isn’t receiving these big payments, but the NBN change could be a net gain for TPG. Telstra’s copper network gave it a significant advantage over competitors, however post-NBN Telstra will have to compete on an equal footing with TPG, Optus and others.

Difficulty to increase prices

Data is getting cheaper; TPG is offering unlimited data on its ADSL2+ for $59.99. This would appear to now be a price ceiling – you can’t get any more data than unlimited. This will make price increases higher than $60 for broadband incredibly difficult for every company.

TPG and Telstra can still grow their revenue in this area though, although they will need to take market share from others. This may be possible as TPG is offering the cheapest product and Telstra is considered to have the best product.

Expansion plans

The one area where TPG isn’t competing strongly with Telstra is the mobile phone market. There has been speculation that TPG was interested in buying Vodafone Australia, so far nothing has happened here.

Both TPG and Telstra have plans to expand overseas. TPG wants to expand into Singapore, while Telstra wants to become a powerhouse throughout Asia. This gives both companies ample opportunity to keep growing and diversify their earnings.

Several Australian companies have had a pretty bad experience expanding overseas such as National Australia Bank Ltd (ASX: NAB) and Insurance Australia Group Ltd (ASX: IAG). TPG and Telstra will have to be careful to make sure they don’t join that list.


Telstra is currently trading at 14.3x FY16’s earnings (source: Commsec), whereas TPG is trading at 20x FY16’s earnings. Telstra is cheaper based off historical earnings, but with a medium term outlook it could be TPG that’s better value.

Which to buy?

Telstra has been a very consistent dividend payer, but its earnings and value have just been going sideways for too long.

TPG’s drop in share price presents a compelling opportunity to buy in my opinion. Once the TPG shares have bottomed out, it could be a good time for investors looking to add some more telecommunications stocks to their portfolio.

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Motley Fool contributor Tristan Harrison 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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