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Victor Selva
Victor Selva
Articles (150) 

Searching for Income? Two Telecom Companies for Hungry Investors

October 17, 2013 | About:

The U.S. diversified telecommunications services industry is a mature, cyclical and capital intensive one, with high entry barriers due to the dominance of well-established players with strong brand identities. So let's take a look at the two largest U.S. telecom stocks and see which one is doing better, and thus stands as the best investment. I should highlight that the S&P Integrated Telecommunication Services sub-industry index increased 3% year to date, well below almost every benchmark.

The AT&T Inc. (NYSE:T) is one of the world´s leading communications service carriers. The company operates in various segments: Wireless, Wireline and “Other.” The first one is the most important business for the company (about half of sales), and it is probably most well known for its wireless cell phone services.

Time to Look Abroad?

The company is seeking opportunities to expand its wireless business in international markets. AT&T is looking at markets in Europe, specifically in U.K., Germany, and the Netherlands. With these initiatives, it wouldn´t be strange if the firm expanded its revenues considerably. Although these markets are mature, strong competition already exists, and Europe is going through a tough economic patch, the company bet part of its growth investing in the European mobile market.

In June 21, Bloomberg reported that AT&T explored a deal to purchase almost one third of Telefonica, Spain´s largest telecom company. In July 2013, AT&T announced plans to acquire the assets of Leap Wireless International for $15 per share in cash, and to assume its outstanding debt (net debt of $2.8 billion). "The combined company will have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost pre-paid service" AT&T said in a statement. With the deal, AT&T will gain a stronger pre-paid business line while covering 137 million people in the PCS and AWS bands covering.

Dividend Champion

The company has demonstrated its commitment to returning cash to investors in the form of dividends, even raising them through the financial crises. The current dividend yield is 5.2%, which is very good to protect the purchasing power, especially considering that it is above the industry mean as well as S&P 500 average dividend yields.

The Leader

Verizon Communications Inc. (NYSE:VZ) operates in two segments: Wireless (66% of total revenues in 2012) and Wireline (34%). Covering more than 95% of the U.S. population, the company adds new subscribers each year and, through its joint venture with Vodafone Group, has 100 million wireless customers. The company continues to gain market share though the evolution of 4G Long Term Evolution (LTE) network and smartphone sales (7.5 million smartphones during the quarter).

Smart Acquisition

The wireless competitive landscape has changed in 2013, with T-Mobile USA (TMUS) merging with MetroPCS Communications and Japan-based SoftBank acquiring a controlling stake in Sprint (S). In this line, the $130 billion deal to become the sole owner of Verizon Wireless, makes Verizon a good strategist, because it will offer better packages and therefore seeking for more customer loyalty.

In terms of valuation, both companies carry substantial premiums to the industry average of 17 x P/E. AT&T trades at 25.7 times its earnings, and Verizon, at 87.1. Although these valuations might discourage investors, their Forward P/E ratios are much more attractive, at 12.81 x and 14.72 x, respectively.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: The return on equity. Both companies stand below the industry mean of 11.3%. While AT&T ROE of 7.9% is quite low, Verizon's 2.6% is simply alarming

It is very important to understand this metric before investing in a high-growing company.

Final Comment

Looking at the ratios it seems that if your goal is to make a quick gain, big telecom companies will probably not be the best choice. For a long term perspective, both companies are a buy, but I would advise fundamental investors should consider adding Verizon to their portfolios as it seems to be a more attractive option for investors.

Hedge fund managers have also been active in the company. Hedge fund guru´s like Jim Simons, Steven Cohen and Paul Tudor Jones are invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.

Rating: 4.0/5 (15 votes)


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