Some of the main characteristics that I like to look for in a quality business include having the ability to increase the price of its product and that its earnings are quite defensive, almost to the point of having monopolistic features.
Telstra Corporation Ltd (ASX: TLS) used to fit the monopoly definition perfectly because it owned most of the telecommunication infrastructure in Australia. This allowed it to generate higher margins or charge other companies to use its network.
However, all telecommunication companies will soon have to sell most of their broadband packages using the NBN's infrastructure. It's expected that Telstra, along with TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC), will experience a fall in profit margins.
The change to the NBN also means that a large number of smaller companies can compete with the big telcos. Telstra will have to work very hard to maintain its current broadband market share.
Another problem is that customers are expecting more and more data for essentially the same price. Companies can't charge customers for more data if they are already receiving unlimited data. Therefore, the overall industry may not grow much, growth will come from stealing market share from competitors.
Out of the three large players I think TPG offers investors the best chance of growth as it plans to launch mobile networks in Australia and Singapore. It's currently trading at 13x FY17's estimated earnings with a grossed-up dividend yield of 3.68%.
However, I would prefer to gain exposure to TPG through an investment in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which has a large stake in TPG.
Foolish takeaway
The telco sector has been a good industry to be invested in until recently. Telstra, Vocus and TPG could all produce market-beating returns from here but I'm not confident that they will.
