The telecommunications sector enjoys long-term tailwinds associated with ever increasing data use. In the last year, cloud-based software as a service has been a hot sector, but investors should remember that telecommunications companies are required to connect users with the cloud. Their services are indispensible to many businesses.
While it's true that wireless telecommunications are increasingly important, these connections will always be secondary to fibre optic connections. This is because wireless broadband will be connected to fibre networks at the transmission point. Furthermore, fibre optic connections are a lot faster than wireless ones, and wireless connections slow down noticeably as more users connect. Wireless is important, but fibre optics will form the backbone of the telecommunications network of the 21st century.
One of the most impressive fibre-owning telecommunications company is TPG Telecom (ASX: TPM). TPG has a burgeoning fibre optic network and has bought wireless spectrum that will allow it to provide wireless broadband in heavily populated areas. Management is honest and competent and the company is a debt-free cash flow machine.
My favourite fibre company is Vocus Communications (ASX: VOC), which competes directly with TPG, but is completely focussed on corporate customers. However, the share price is up about 35% since I recommended the stock in this article, and Vocus is not my best pick at current prices. Vocus owns fibre optic cables connecting CBD areas in all the major capital cities.
Size wise, it's hard to go past Telstra (ASX: TLS), the telco with the most customers. In particular, Telstra has successfully grown its mobile customers, and is well positioned to benefit from the increasing penetration of smart phones. The company is also winning new customers to its broadband network, and is well positioned to benefit from the roll out of the NBN. Not only does Telstra's copper network generate cash flow, but the ducts can be used to install fibre, which is what the NBN Co is doing (for a price).
Investors can afford to look past Telstra's declining revenues from fixed lines. While the company is not particularly focussed on building its own fibre optic network, it nonetheless has exposure to the roll out of fibre. Telstra has also been making large capital expenditures, and in my opinion, the market often focuses on the short-term results at the expense of the long-term view.
Another company worth looking at is Amcom Telecommunications (ASX: AMM), which is quite similar to Vocus. However, Amcom pays a more substantial dividend, and has been around for a lot longer. Like Vocus, it owns fibre optic cables and provides cloud-computing services to corporate customers. Amcom is currently trading at a more attractive price than Vocus, in my opinion.
Finally, Optus, which is owned by Singapore Telecommunications (ASX: SGT), also has fibre assets. The company owns its own fibre from Sydney to Melbourne and Sydney to Brisbane, and has access to an Australia-wide network. Like Telstra, it has the advantage of size: it is Australia's second biggest telecommunications company.
Foolish takeaway
My favourite fibre companies are Amcom, Vocus and TPG Telecom because I think they are very likely to grow free cash flow over the coming years. Each company owns fibre networks that I believe will have a lot a value long after they are fully depreciated. However, it's hard to go past Telstra's yield of over 5.5% at current prices. Despite significant share price appreciation across the board, I believe some exposure to telecommunications is desirable.
