Telco takedown: Why Australia’s big telecoms are an opportunity

Australian telco shares have been smashed over the past 6 months or so. Probably the company that struck me most was Vocus Group Ltd (ASX: VOC):

Telstra, TPG, and Vocus over the past 5 years (source: Google Finance)

All those acquisitions, all that growth, and Vocus shares are back where they were at the start of 2014. Short-sellers are betting heavily against Vocus in particular, with 11% of its shares short sold. Only 4% of TPG and 0.6% of Telstra are held for short sale.

Investors are seemingly worried that the establishment of 3 mega-telcos will result in increased competition and lower prices and profits for everybody. That’s why Telstra Corporation Ltd (ASX: TLS) shares plunged yesterday after TPG Telecom Ltd (ASX: TPM) announced its acquisition of mobile spectrum, which would allow it to also offer mobile plans.

With share prices being crunched across the board, there’s a clear case to be made for each of the above 3 companies. At $4.20 a share, Telstra pays a 7.3% dividend that grosses up to almost 10% once franking credits are included – attractive for income investors, even if the dividend does get cut. Even with no capital growth, Telstra’s dividend could be a market beater on its own.

Vocus itself yields more than 4% in the first time since ever, while TPG has the recent mobile acquisition and its other investments in growth fibre. Vocus is also investing heavily in growth, although both it and TPG’s books are a bit messy with all the recent acquisitions.

The big fear

The big worry for investors, in my opinion, is that the telecom sector (particularly mobile) becomes overly competitive and leads to lower margins for everyone. That seems unlikely given that margins have proven sustainable in recent years, but the NBN is seen as a big opportunity to compete for smaller telcos like Vocus and TPG and lower margins should not be ruled out.

Even so, at today’s prices, there’s a convincing buy case to be made for each of the above businesses. I’ve avoided the telco sector for years but it is starting to look very cheap to me, and I can see myself investing here in the near future.

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Sean O'Neill 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.

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.