Better buy: TPG or Telstra shares?

Both TPG Telecom Ltd (ASX: TPG) and Telstra Group Ltd (ASX: TLS) shares may be attractive to investors looking for ASX telco shares that can provide defensive earnings. But, there’s one that appeals to me more than the other.

Telstra is one of the biggest brands in Australia, while TPG operates a number of brands including Vodafone Australia, TPG and iiNet.

I will look at a few key areas that influence my decision.

Dividends

I wouldn’t want to sell my shares if I were a long-term investor. But, I would want to receive a flow of dividends because that would be how I access my returns.

TPG just reported its FY23 result, which included an annual dividend of 18 cents per share. This payout was the same as FY22 and translates into a grossed-up dividend yield of 5.2%.

Telstra recently revealed its FY24 first-half result which included a dividend per share payout of 9 cents per share (an increase of 5.9%), which translates into an annualised 18 cents per share dividend. At the current Telstra share price, that’s a grossed-up dividend yield of 6.6%.

On this front, Telstra is the winner – its dividend is growing and the dividend yield is bigger.

Operating leverage

One of the main things that I want to see from a business is that its profit can grow faster than revenue, even if slightly faster.

Investors normally focus on how much profit a business makes, so profit growth is a pleasing characteristic.

These ASX telco shares have the ability to display operating leverage. Once the telecommunications network infrastructure has been constructed, the additional users can leverage that same infrastructure, enabling the profit margins to grow assuming everything else remains the same.

In the most recent results, TPG reported service revenue growth of 4.3% to $4.63 billion, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 9.4%, but adjusted net profit after tax (NPAT) dropped 9.6% to $584 million.

Telstra reported in the FY24 first half that total income increased 1.2% to $11.7 billion, underlying EBITDA grew by 3.1% to $4 billion and net profit after tax rose 11.5% to $1 billion.

So Telstra delivered better profit growth, which is helpful to the underlying value of Telstra shares.  

Business plans

Both companies are working hard on growing their mobile businesses by investing heavily in their 5G networks.

Telstra claims to have the market-leading network, and this seems to be attracting a good amount of subscribers each reporting period, which is helping its operating leverage. TPG has growth plans too, but the network is not as big as Telstra and it has fallen behind because of the delayed merger between TPG and Vodafone Australia.

I like that Telstra has been working on diversifying its earnings in a number of different ways, including growing internationally with Digicel Pacific, expanding in digital healthcare with Telstra Health, and growing its cybersecurity capabilities (after an acquisition).

Foolish takeaway

Quite often, being the biggest and strongest comes with advantages. Hence, in my opinion, Telstra is the clear leader and Telstra shares are the better buy.

The post Better buy: TPG or Telstra shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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