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Three Strong High-Yield Telecom Stocks to Look Into

July 12, 2012 | About:
A couple years ago, I wasn’t particularly bullish on telecoms. I considered MLPs a better area for high yields than telecoms, even when the long-term tailwinds were factored into the telecoms. However, after one of these telecom stocks has performed rather poorly in the markets, one has performed only reasonably well, and one has outperformed, I view them as a group to be decent values in an industry with good long-term growth prospects. Stocks that don’t do well in the markets while the underlying company fundamentals and dividend payments continue to grow start to become more appealing over time. Some of the deeper values are due to heavy exposure to Europe, which gives contrarian investors some interesting potential stock selections.

The world is undergoing a data shift. Networks speeds have comfortably passed the critical point where cloud-based software is competitive with their client-based rivals. Energy-efficient processing power has comfortably passed the critical point where everyone can have a mobile-connected mini-computer in their pocket (smart phone) or in their bag (tablets, etc.), and where apps and rich media are easily consumed on these mobile devices. The cumulative effect is clearly observed; all work together, and all of it requires substantial data transmission.

Tech companies are striving to control the living room with their consoles and platforms, because other forms of communication and media like land line phones and cable television have the potential to be replaced by internet models. Platforms can be consolidated into data only, rather than a set of several types of information channels. Enterprise customers are increasingly consuming tablets and smart phones for their employees, and tech companies are rolling out software as a service as an alternative to software as a product.

Telecom stocks are known for their utility-like resilience and high dividend yields. While there are many strong telecom stocks providing data, there are four in particular that I view as particularly solid dividend investments.

Vodafone (VOD)

Vodafone holds a diverse portfolio of mobile assets around the world, including a 45% stake in Verizon wireless, and millions of customers each in India, Germany, Italy, Africa, the UK, and Spain. Unlike many other telecoms, it’s a rather pure play on mobile communications.

The company has had fairly strong revenue growth of 4.5% per year on average over the last seven years, but revenue growth and EPS have been hit recently by some divestitures and streamlining. Through a combination of regular dividends (yielding about 5.7% currently) and most recently, a special dividend, Vodafone consistently returns cash to shareholders and currently covers its regular dividend payments with earnings and free cash flows.

Smartphone penetration has been increasing in their markets, and the number of data users on their network has doubled in the past two years. The company operates in a highly competitive and somewhat commodity-like market, but industry tailwinds are growing the market considerably, and large players with considerable assets and spectrum rights have a somewhat defensible position.

Overall, I view Vodafone as a decent international investment at the current time, with prices for the ADR in the upper $20′s. It wouldn’t be a bad idea to look for dips, though.

For more information, see the recent Vodafone analysis.

Telefonica (TEF)

Compared to Vodafone, Telefonica has a larger debt load and less stability. The company has large market exposure to their home country of Spain (among the weakest economies in Europe currently), and has had to reduce their dividend in 2012, while still maintaining a solid yield.

The company, however, provides a diverse set of mobile and fixed telephony, internet services, and television, and has strong exposure to South America. Revenue growth remains decent.

There are several European telecom companies that I currently view as rather deep but uncertain values, including Telefonica and France Telecom, among others. Due to their rather uncertain macroeconomic situation and specific company problems or difficulties, I don’t view these as the most suitable for casual, mostly-stress-free investing. However, for people interested in a bit more potential upside, I do view them as rather substantially undervalued. After significant earnings and stock declines, they are trading at fairly modest valuations despite having the reasonable potential for longer-term profitability rebounds which I do not believe are fairly factored into the stocks. Although value traps are always a risk, outsized returns generally result after the situation doesn’t appear too rosy.

AT&T (T)

AT&T is a provider of wired and wireless services and is one of the largest of telecommunications companies in the world. Unlike its largest competitor Verizon, it has full ownership of its mobile operations (whereas Verizon shares ownership of Verizon Wireless with Vodafone). To my knowledge, AT&T pays the largest dividend out of all U.S. companies in terms of the total value of dividends paid to shareholders per year (currently over $10.2 billion).

AT&T’s revenue growth rate averaged only 1.6% per year over the last four years, but this hides the success of their growth divisions. Their legacy businesses are shrinking, impacting revenue, while their mobile division performs very strongly. As I described from their report in my recent AT&T analysis:

The need for data results in enormous capital expenditures, but also increases in revenue. Wireless services in particular have grown exponentially. As AT&T’s 2011 annual report shows, between 2006 and 2011, the number of wireless subscribers increased from 61 million to 103 million, smart phone users increased from 7 million to 40 million, wireless data usage has surged from near-zero to upwards of 30 petabytes a month, and wireless revenue has grown fivefold. The company has reported that it expects its wireless data usage to grow another 8x in the next five years. AT&T’s “U-Verse” revenue grew almost 10-fold over three years, up to nearly $7 billion.
Overall, around three quarters of AT&T revenue is considered part of their growth segments. This strong underlying set of businesses is poised to do very well, with significant tailwinds. The market, however, has noticed, and AT&T at $35/share isn’t trading at quite the value it once was. I’d look for a dip to the low $30′s before being interested in the stock again, which might not be an entirely unreasonable scenario some time this year.

Full Disclosure: As of this writing, I have no positions in any stocks mentioned. Vodafone is solidly on my watch list.

About the author:

Dividend Monk
Dividend Monk provides free stock analysis articles with an emphasis on dividend-growth investments. Also discussed are investing strategies, personal finance, and industry outlooks.

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