Australian telco shares have been smashed over the past 6 months or so. Probably the company that struck me most was Vocus Group Ltd (ASX: VOC):
All those acquisitions, all that growth, and Vocus shares are back where they were at the start of 2014. Short-sellers are betting heavily against Vocus in particular, with 11% of its shares short sold. Only 4% of TPG and 0.6% of Telstra are held for short sale.
Investors are seemingly worried that the establishment of 3 mega-telcos will result in increased competition and lower prices and profits for everybody. That's why Telstra Corporation Ltd (ASX: TLS) shares plunged yesterday after TPG Telecom Ltd (ASX: TPM) announced its acquisition of mobile spectrum, which would allow it to also offer mobile plans.
With share prices being crunched across the board, there's a clear case to be made for each of the above 3 companies. At $4.20 a share, Telstra pays a 7.3% dividend that grosses up to almost 10% once franking credits are included – attractive for income investors, even if the dividend does get cut. Even with no capital growth, Telstra's dividend could be a market beater on its own.
Vocus itself yields more than 4% in the first time since ever, while TPG has the recent mobile acquisition and its other investments in growth fibre. Vocus is also investing heavily in growth, although both it and TPG's books are a bit messy with all the recent acquisitions.
The big fear
The big worry for investors, in my opinion, is that the telecom sector (particularly mobile) becomes overly competitive and leads to lower margins for everyone. That seems unlikely given that margins have proven sustainable in recent years, but the NBN is seen as a big opportunity to compete for smaller telcos like Vocus and TPG and lower margins should not be ruled out.
Even so, at today's prices, there's a convincing buy case to be made for each of the above businesses. I've avoided the telco sector for years but it is starting to look very cheap to me, and I can see myself investing here in the near future.
