For many years, income investors have gravitated toward telecom stocks because of their generous dividend yields. Indeed, the average yield of stocks in the telecom space is normally well above the Value Line median.
To create our list, we ran a simple screen of stocks in the Telecom Utility, Telecom Services, and Telecom Equipment industries, and ranked them by dividend yield, from highest to lowest. Our only other criteria was that all issues trade above $5.00 a share.
Although these three industries sound very similar to one another, there are stark differences between them, and even between individual stocks in each group. Operators in the Telecom Utility Industry are generally regulated, and generate most of their revenue by providing customers with traditional fixed-line voice service. However, this legacy business is steadily shrinking, and many of these utilities are looking to expand their services to include wireless communications, high-speed Internet, and television. Stocks in this group typically offer the highest yields of the three industries under review, and many have substantial overseas operations.
The Telecom Services group includes several integrated telcos, which provide wireline, wireless, and other non-traditional services. Companies in this industry may have traditional wired operations, but most rely heavily (or solely) on wireless service for their revenues. Yields in this group are normally attractive, though not as high as those in the Telecom Utility space.
Companies in the Telecommunications Equipment Industry produce technologies and services that are used to facilitate people's communications. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, digital subscriber-line (DSL) and cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multi-national corporations, telephone companies, governments, universities, institutions, commercial businesses and consumers. Stocks in this group normally have lower dividend yields than their Telecom Utility and Telecom Services brethren.
In this screen, we highlight three companies, Frontier Communications Corp. (FTR), AT&T (T - Free AT&T Stock Report), and Nokia (NOK), that rose to the top of our list. Subscribers can replicate and, perhaps more importantly, customize this screen using Value Line’s online stock screening tool.
Frontier Communications Corp
Frontier Communications provides local and long distance voice, Internet access, broadband, and television services predominantly to rural areas and small and medium-sized towns and cities. On July 1, 2010, Frontier acquired Verizon’s (VZ - Free Verizon Stock Report) landline assets in 13 states. As a result, the Company is the nation’s largest communications services provider focused on rural areas, with approximately 5.7 million access lines and 1.7 million broadband connections.
Frontier communications currently boasts the third highest dividend yield —10.25%— out of the telecom interests under our review, and one of the highest in the S&P 500 Index for that matter. Cost savings related to the huge Verizon deal are mounting, which is bolstering free cash flow. Specifically, job cuts, vendor rationalization efforts, and complex systems conversions should keep the green flowing for years to come. In fact, annualized synergies stemming from the acquisition are expected to reach at least $400 million and $550 million by the end of 2011 and 2012.
Speculation that the Verizon integration would damage its cash flow prospects have yet to come to fruition, which we attribute to the company’s veteran management team and the extensive planning done before the acquisition was completed. This gives us confidence that the impressive yield will be maintained for the foreseeable future.
AT&T Inc. is one of the world’s largest telecom holding companies and is the largest in the U.S. The Wireless unit consists of AT&T Mobility, which provided approximately 47% of 2010 operating revenues. At December 31, 2010, it had more than 95 million wireless subscribers. Wireless data revenues represent an increasing share of revenue thanks to proliferation of data-centric devices such as smartphones notebooks, tablets, eReaders, and GPS devices. The Wireline segment provided approximately 49% of 2010 operating revenues through traditional local and long distance services and IP based data services. Revenues from traditional voice accounts have been declining as customers switch to wireless, cable and other Internet-based providers.
Recently AT&T agreed to buy T-Mobile (USA) from Deutsche Telekom AG (DTEGY) for roughly $39 billion in stock and cash. The deal would make AT&T the nation’s largest wireless operator, with a subscriber base of about 130 million versus archrival Verizon’s 100 million. However, The Justice Department filed an antitrust complaint in an effort to block the merger saying it would cause higher prices, less innovation and lower quality of service. Value Line analyst Justin Hellman believes “the addition of T-Mobile would create new opportunities for AT&T to increase smartphone penetration and data revenues.” AT&T plans to contest the complaint in court.
Meanwhile, the company continues to activate iPhones at a steadfast pace. This contradicts what many investors believed would happen when Verizon began selling the popular device in early 2011. Even though there is risk that AT&T will have to pay a lofty breakup fee if the Department of Justice eventually nixes the T-Mobile USA merger, we believe strong underlying fundamentals will be enough to keep the dividend yield near the current 6.2%.
Nokia is the world’s largest manufacturer of cellphones. It also develops and manufactures infrastructure equipment and systems for wireless and fixed networks. It produces a range of affordable mobile phones offering voice capability, basic messaging and calendar features, and, increasingly, color displays, radios, basic cameras and Bluetooth functionality. It also produces smartphones for a broad range of consumer groups, offering Internet access, entertainment, location-based services, and other applications and content.
The company has been struggling of late in the face of stiff competition from the likes of Apple (AAPL), Samsung, HTC, and Motorola Mobility (MMI). Indeed, Google’s (GOOG) Android operating system, and Apple’s iOS have proven to be more popular with consumers worldwide. According to Gartner, the company sold 23.9 million smartphones in the second quarter making it the number one vendor, but its market share fell from 41% to 22% on a year over year basis. This was less than investors had been expecting since its stock has risen 15% since the news was released on August 11, 2011, compared to a 2.5% decline in the S&P 500 index. This may be an indication that the stock was oversold.
The company plans to incorporate Microsoft’s (MSFT - Free Microsoft Stock Report) Windows Phone 7 operating system for upcoming handsets. The success of these devices is highly uncertain, thus, conservative investors would best be served looking elsewhere. However, recent results have been somewhat encouraging and we expect the current dividend payout to stay consistent over the next two years, keeping the yield around the current 8.6%. Therefore, income investors with a healthy appetite for risk may want to give this equity a closer look.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.