A tale of two telcos…
The Telstra Corporation Ltd (ASX: TLS) share price and the TPG Telecom Ltd (ASX: TPM) share price have gone their separate ways so far in 2019. The Telstra share price has rewarded investors handsomely YTD so far, up an incredible 40% (not including dividends). TPG's share price, meanwhile, has rolled around in the comparative doldrums, up 4.29% for the year so far.
So which is the better buy for the long term? Let's take a look at both companies and find out.
Telstra and T22
Telstra has moved from market dog to market darling over the past 12 months (see above). After cutting its dividend heavily over the last two years, investors who had become used to the steady income of Telstra shares got spooked and bailed out of the telco. Telstra shares went from $6.60 in 2015 down to an all-time low of $2.60 in June last year.
However, a series of favourable developments has helped Telstra shares recover to the levels we see today. Firstly, rivals TPG and Vodafone were denied the chance to merge their operations by the ACCC – sparing Telstra a more cashed-up rival provider. Secondly, Telstra has implemented a lauded cost-cutting redirection program known as T22. T22 (no, not an Arnold Schwarzenegger movie) involves cutting staffing and other costs and simplifying Telstra's current product range as well as separating Telstra's infrastructure assets into a new entity to be known as InfraCo. As well as these developments, Telstra is well-placed in the race to build a 5G network – already rolling out trials. 5G is predicted to bring the next rush of profitability for telcos in the post-NBN world and so this is a promising endeavour for Telstra.
What about TPG?
TPG has moved in the opposite direction to Telstra in investors' minds recently. When TPG announced its proposed merger with Vodafone, TPG shares shot up to a record high of $9.65, but a series of unfavourable events have contributed to the fall back to the $6.50 range we see today. Firstly, as mentioned above, the ACCC has blocked TPG's merger with Vodafone. AS TPG is more dominant in the fixed-line sector, and Vodafone in the mobile sector, the merger was initially well received by investors looking forward to a stronger competitor in the Australian telco market. When the ACCC decision was announced, the share price fell sharply.
What's more, the Federal government has put a stake through the heart of TPG's 5G plans. TPG had hoped to build a rival 5G network to Telstra using technology supplied by Chinese telco Huawei. When the government decided to ban Huawei from Australia, TPG's plans went up in smoke and CEO David Teoh has implied that TPG won't be going down this route for the foreseeable future, if ever. TPG is still a formidable player, with its cut-throat pricing and effective advertising continuing to make waves. But the future for TPG is certainly a lot murkier than Telstra at this point.
Foolish Takeaway
Personally speaking, Telstra's future plans are a lot more promising from my point of view. Telstra has a formidable branding moat when it comes to mobile coverage and quality and its efforts in 5G only work to strengthen this. TPG is still a quality company, but until its future plans become clearer, I'll be sticking with Telstra.
