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Why the TPG share price is up 38% in FY20

Of all the S&P/ASX 200 Index (ASX: XJO) shares that have delivered outperforming returns for investors in the 2020 financial year, I think TPG Telecom Ltd (ASX: TPM) is one of the most surprising. After all, an ASX telco isn’t the first place most investors look in the search for a market-beating investment.

But the performance of the TPG share price over FY2020 has warranted a re-think of this logic. TPG shares began FY20 at $6.47. Today (on the eve of the new financial year), those same shares will set you back $8.93. That represents a 38.02% gain for TPG shareholders over the past 12 months.

Why has the TPG share price hit the roof?

The past year has been a perfect storm for TPG shares, with several events coming together in the telco’s favour. Firstly, TPG’s planned merger with Vodafone has been greenlit by shareholders and the Federal Court after initially being blocked by the ACCC on competition grounds. This enables TPG to merge its high-performing, fixed-line network of customers with Vodafone’s established market of mobile customers. This ‘new TPG’ looks better set to take the fight up to its competitors in Optus and Telstra Corporation Ltd (ASX: TLS). The combined entity (which officially listed today) is due to start ordinary trading in its own right soon, under the far more appropriate ‘TPG’ ticker symbol.

Secondly, shareholders have also been excited about TPG’s spin-off of its Singapore telco business into another separate entity, Tuas Limited (ASX: TUA), which also hit the boards this morning. As part of this ‘bait and switch’ merger/de-merger, TPG shareholders are also looking forward to a special 49 cents per share dividend which is set to be paid on 13 July.

All of these factors have combined to push sentiment surrounding TPG shares to new highs.

Is TPG still a buy today?

I think the new TPG is shaping up to become a force to be reckoned with on the ASX telco scene. It looks as though the company will benefit from synergies with Vodafone, and TPG’s enigmatic-but-highly-rated CEO David Teoh is a proven performer. However, I do think TPG still has its work cut out for it in competing with Telstra. Telstra has always been the dominant business in the ASX telco space, and I don’t see TPG erasing this advantage anytime soon. Telstra still has the lion’s share of both the fixed-line and mobile markets, and will likely continue holding on tightly to these due to the company’s strong brand and dominant mobile network.

Furthermore, I’m far more bullish on Telstra’s 5G network plans than TPG’s, with the latter acknowledging it has fallen behind in the 5G race. 5G promises to be the ‘next big thing’ in telco, with higher speeds, lower latency and almost limitless ‘Internet of Things’ applications being touted. Even though TPG shares have been the winner in FY2020, I’m still betting on Telstra for the rest of the decade.

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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 Scott Phillips.

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