Why I’d buy Vocus Group Ltd shares before Telstra Corporation Ltd

With the beat-up of Australia’s telecom sector recently, many investors have been going bargain hunting. I have been one of them, and recently ended up buying shares in Vocus Group Ltd (ASX: VOC). You can read the specific reasons why in the link above, but the purchase carries an implicit question: Why did I buy Vocus and not another well-known telco, like Telstra Corporation Ltd (ASX: TLS)?

There were four main reasons.

  • Vocus is growing faster than Telstra and can expand its market share at the expense of incumbents (like Telstra)
  • Vocus has greater ability to reinvest in itself with new projects (e.g. Australia-Singapore Cable) and ability to improve its customer service, whereas Telstra’s side projects have to become very large to ‘move the dial’ on earnings
  • Over time Vocus should pay attractive dividends; a smaller yield than Telstra perhaps, but a small trade-off for greater growth opportunity
  • Although Vocus is not outstandingly cheap on some metrics like enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA), I think today’s price promises attractive upside if Vocus can work out its issues and grow earnings. I simply don’t see Telstra shares doubling in the next 5-10 years, but maybe Vocus can.

Or to put it more simply, fund manager Peter Lynch once quipped that ‘businesses in mature industries see clouds, while businesses in new industries see pie’ (‘pie’ referring to market share). I’m misquoting him a bit, but when I look at Telstra I see clouds, and when I look at Vocus I see pie.

While the near term carries some uncertainty for Vocus as it works out its issues, it has an attractive portfolio of long-lived assets that could generate an attractive amount of cash for shareholders over the long term.

If you're not keen on Vocus, there's another strong dividend share - which I also hold - looking attractive at today's prices:

A Big, Fat, Fully Franked Dividend

This company's dividend is almost the stuff of legends. Since it started paying dividends in 2007, it has increased its payout to shareholders every single year, a run that includes 21 consecutive dividend increases.

Based on the last 12-months of dividends, its shares are currently offering a fully-franked 4.8% yield, which grosses up to almost 7% when those franking credits are included. And in stark contrast to the likes of Commonwealth Bank and Telstra, this company just increased its dividend by over 13%, and guided for 2017 profits to grow by 20%!

Discover the name of this "new breed" of blue chip along with 2 others in our new FREE report "The Motley Fool's Top 3 Blue Chips Stocks For 2017."

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra Limited. Motley Fool contributor Sean O'Neill owns shares of Vocus Communications Limited. The Motley Fool Australia owns shares of Vocus Communications Limited. 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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