Which telecom stock could give you the better return?
Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) are successful telecommunications and broadband service companies. One is the giant of the industry, but the other is a fast-growing mid-cap that is steadily taking market share.
I have compared the two in three ways to see which might give investors more bang for their investing buck.
Earnings
TPG Telecom is a $5.9 billion company and Telstra weighs in at $75.8 billion, so quite a size difference, but the great equaliser is earnings per share (EPS) growth. Investors should not be looking for the biggest stock, but the company that can generate the biggest return.
| Earnings per share | |||||
| (cents) | 2010 | 2011 | 2012 | 2013 | 2014 |
| Telstra | 31.3 | 26.1 | 31.5 | 30.6 | 38 |
| TPG Telecom | 7.6 | 10.1 | 11.5 | 18.8 | 21.6 |
Looking over Telstra's past five years of earnings from 2010 to 2014, EPS rose from 31.3 cents per share to 38 cps, for an average 5% growth annually. Not exactly exciting, but stable.
TPG Telecom shot up from 7.6 cps to 21.6 cps, or 29.8% annual earnings growth on average. TPG Telecom may be coming from a smaller base, but I would still rather have that higher growth.
Dividends
Telstra has the reputation for a rock-solid dividend. Its current 4.8% yield is fully franked and TPG Telecom's 1.4% fully franked yield isn't much of a match.
TPG Telecom's dividend growth rate is much higher than Telstra's. If TPG Telecom's earnings continue to grow at the current high rate, over time its dividend could rival Telstra's. For now, though, Telstra wins out here.
Five-year shareholder return
In the last five years, TPG Telecom's shares have risen greatly, yet Telstra stock has more than doubled during the same time. Looking at the total shareholder return, which combines the share price gain and reinvested dividends, the two companies came out with fairly close five-year results. Telstra returned an annualised 24.3% each year. TPG Telecom pulled ahead with an average 29.7% annual return.
This doesn't mean these returns will stay the same in the future, but long-term trends can indicate future potential returns, so I would be looking for more earnings growth from TPG Telecom than Telstra.
There are a number of other ways you can compare the two stocks, but from these three categories, I would prefer TPG Telecom for greater future returns. TPG Telecom offers wholesale and retail service for NBN high-speed broadband. With its own internet network infrastructure, it could become a major player in this space alongside the NBN company, which is overseeing the rollout of NBN services across Australia.
