Better buy: Telstra shares or TPG?

Which of these would be a better telco stock to call on for returns?

| More on:
A woman holds up hands to compare two things with question marks above her hands.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Telstra and TPG both offer an essential service, which could mean defensive earnings
  • On an earnings multiple and dividend yield basis, Telstra appears to be the better choice
  • Telstra has such a strong regional network, that TPG wanted to use it as well

The ASX telco share sector could be a source of defensive returns because of the essential nature of the internet for households and businesses. ASX investors have two main choices to choose from – Telstra Group Ltd (ASX: TLS) shares and TPG Telecom Ltd (ASX: TPG) shares.

I'm going to compare a couple of the main statistics for each of these businesses, and then talk about the main reason why I'd pick one over the other.

Valuation

The price/earnings (P/E) ratio is not exactly a perfect measure of which business is better.

A company's profit can be massaged to make it look better, for example by spreading out research, development and asset depreciation costs over multiple years.

Alternatively, investing for growth, which is good for the long term, can hurt profit in the short term.

But, comparing profit valuations is probably as good as any metric to look at.

FY23 may be a period of adjustment for a number of businesses and sectors with the changes in the economy and interest rates. So, we'll look at the projections on Commsec for FY24 and FY25.

The TPG share price is valued at 32 times FY24's estimated earnings and 24 times FY25's estimated earnings.

Looking at the Telstra share price, it's valued at 24 times FY24's estimated earnings and 21 times FY25's estimated earnings.

Purely on a P/E ratio comparison, Telstra shares look better valued.

Dividend yield

Dividends can be a key way for investors to generate cash returns if they don't want to sell their shares and lock in capital gains.

Looking at the Telstra grossed-up dividend yield projections, it could be 5.9% in FY24 and 6.25% in FY25.

In FY24, TPG could pay a grossed-up dividend yield of 5.1% and 5.4% in FY25.

Both of the ASX telco shares are projected to grow their payouts over the next two years, but Telstra is seemingly going to pay a stronger yield in both years.

While the dividend isn't everything, it could mean that Telstra shares are more rewarding in terms of cash hitting the bank account over the next two years.

Which ASX telco share is better?

The Australian Financial Review recently reported on the latest commentary from the broker Morgan Stanley on the two businesses.

The broker currently has a buy rating on Telstra, with a price target of $4.75. That implies a potential rise of around 10%. A price target is where the broker thinks the share price will be in 12 months.

It said there is "a shift in wallet share from large telcos to software vendors is a potentially small headwind for Telstra but not strong enough to change its profit forecasts or share price valuation."

However, for TPG, the Morgan Stanley price target is $5.60, which is only slightly higher than where it is today. It suggested there could be "margin pressure and fixed-line enterprise headwinds for TPG as a result of new cloud technologies."

For me, the biggest thing that Telstra has going for it is the sizeable advantage it has with its network in both metropolitan and regional areas. It's a key selling point for potential customers. TPG seemed to think Telstra had such a strong network that it wanted to utilise Telstra's regional spectrum – while that agreement is currently blocked on competition fears, it's likely a sign of how a rival views Telstra's power.

Being the number one telco player in the market enables Telstra to increase prices (and profitability), which could bode well for future shareholder returns.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Tpg Telecom. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Communication Shares

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Dividend Investing

Investing for passive income? Keep any eye out for that boosted Telstra dividend today!

If you own Telstra shares, keep an eye out for that juicy dividend payout today.

Read more »

Buy, hold and sell ratings written on signs on a wooden pole.
Communication Shares

Is Telstra stock a buy, sell, or hold?

Do experts rate Telstra as a buy or a sell?

Read more »

A young couple look upset as they use their phones.
Communication Shares

Aussie Broadband share price whipsaws as company denies rumours

Aussie Broadband shares are having a wild month indeed.

Read more »

A woman standing in a blue shirt smiles as she uses her mobile phone to text message someone
Dividend Investing

How are these ASX investors earning an almost 7% dividend yield on their Telstra shares?

Telstra increased its interim dividend payout by 6% from the prior year.

Read more »

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.
Communication Shares

Aussie Broadband share price falls as legal proceedings commence against Superloop

Aussie Broadband is seeking an injunction against Superloop's instruction to sell 37 million shares.

Read more »

A businesswoman exhales a deep sigh after receiving bad news, and gets on with it.
Communication Shares

Aussie Broadband share price tumbles after telco told to sell $47 million stake in a competitor

The telco has been left in a sticky situation.

Read more »

Young woman using computer laptop with hand on chin thinking about question, pensive expression.
Communication Shares

What might an Optus sale mean for Telstra shares?

Should I, as a Telstra shareholder, be worried about an Optus sale?

Read more »

a close up picture of a man's face with an expression of dumbfounded surprise as he holds his hand to his chin as if thinking further about what has just been revealed to him.
Communication Shares

Why are Superloop shares jumping 34% and Aussie Broadband shares sinking 25%?

Origin has caused these big moves today. But how?

Read more »