ASX 200 communication stocks are having a lacklustre year. As a group, they've moved sideways, with the S&P/ASX 200 Communication Index (ASX: XTJ) moving just 1.09% higher in the year to date.
This compares to a 7.8% increase for the benchmark S&P/ASX 200 Index (ASX: XJO).
Top broker Goldman Sachs has published a new note on two of the largest telecommunications stocks on the market, Telstra Group Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPG).
In the year to date, Telstra shares have fallen by 3.27% and are trading at $3.84 per share on Tuesday.
Meantime, TPG shares have lost 9.16% in value and are trading for $4.66 apiece today.
Let's see what this top broker has to say about these two ASX 200 telco stocks.
Buy: 'Attractive' earnings and dividend growth outlook
Goldman has a buy rating on Telstra shares and a 12-month price target of $4.35. This implies a potential upside of 13% for investors who buy today.
But it's not just a capital gain that Telstra shares are potentially offering.
The ASX 200 telco stock is also well-known as a relatively reliable ASX dividend share.
The consensus forecast among analysts on the CommSec platform is for Telstra shares to pay an annual dividend of 18 cents in 2025.
Based on today's share price, that's a dividend yield of 4.69%.
Goldman rates this ASX 200 telco share a buy due to its attractive low-risk earnings and dividend growth outlook through FY25.
The broker commented:
We also believe that Telstra has a meaningful medium term opportunity to crystallise value through commencing the process to monetize its InfraCo Fixed assets — which we estimate could be worth between A$22-33bn.
Although there is some debate around the strategic benefits, we see a strong rationale for monetizing the recurring NBN payment stream, given its inflation-linked, long duration cash flows could be worth A$14.5bn to A$17.9bn, with no loss of strategic benefit.
Although at a headline level, Telstra valuation appears relatively full (vs. peers and vs. 10Y yield), we note: (1) Adjusting out NBN recurring payments (a unique asset), Telstra trades at a much more compelling multiple; (2) Although its yield spread is compressed vs. history, when factoring dividend growth this is more attractive.
Sell: ASX 200 telco stock 'skewed to the downside'
Goldman has a sell rating on TPG Telecom shares with a 12-month target price of $4.40. This implies a 5.6% downside for investors who buy this ASX 200 telco stock today.
Last week, TPG announced the proposed $5.2 billion sale of its fibre network infrastructure assets and Enterprise, Government and Wholesale (EGW) fixed business, including Vision Network, to Vocus Group.
On the plus side, Goldman commented that the deal would improve TPG's balance sheet flexibility.
However, the broker also said, "we expect it also increases uncertainty in TPG's earnings outlook (given less infrastructure earnings), and has removed a potential near-term positive catalyst for TPG".
Goldman is sell-rated on this ASX 200 telco stock because it says the risk/reward profile is "skewed to the downside".
The broker commented:
Despite improved mobile market rationality in Australia, we see downside risks of continued enterprise headwinds, elevated fixed competition and higher cost growth for TPG over the medium term.
We remain cautious on the upside for Fixed Wireless growth to offset NBN fixed declines into the medium term.
As for dividends, the consensus forecast on CommSec is an annual dividend of 18 cents in 2025.
Based on today's share price, that's a dividend yield of 3.86%.
