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 criterion was that all issues trade above $5.00 a share.
Although these three industries appear very similar to one another on the surface, there are stark contrasts 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 within this group normally have lower dividend yields than their Telecom Utility and Telecom Services brethren.
In this screen, we highlight two companies, BCE Inc. (BCE) and Vodafone Group ADR (VOD) for their above-average dividend yields compared to the telecom group, and appealing investment prospects. Subscribers can replicate and, perhaps more importantly, customize this screen using Value Line’s online stock screening tool.
BCE Inc. is Canada’s largest communications company, providing a comprehensive and innovative suite of communication services to both residential and business customers in that country. Operating under the Bell and Bell Aliant brands, the company’s services include Bell Home Phone local and long distance services, Bell Mobility, Virgin Mobile and Solo Mobile wireless, high-speed Bell Internet, Bell Satellite TV and Bell Fibe TV, IP-broadband services and information and communications technology (ICT) services. The businesses are organized into four segments: Bell Wireline, Bell Wireless, Bell Media, and Bell Aliant.
During April 2011, BCE purchased the remaining 85% it did not already own of CTV for $1.3 billion, plus the assumption of $1.7 billion in debt. (CTV operates specialty television, digital media, conventional TV, and radio broadcasting properties.) Consequently, a new unit, Bell Media, was created, containing CTV along with other Bell content assets. We like that move, as the addition of CTV’s wide range of programming has supported ongoing profit growth in BCE’s Video unit. What’s more, content and advertising cost synergies are resulting from the convergence of CTV with BCE’s broadband and mobile assets. That said, CTV’s profit margins have been significantly below historical norms.
The company’s dividend is currently yielding around 5.2%. We expect BCE’s ample free cash flow to easily cover the dividend distribution in the coming years. A long history of dividend increases should also appeal to income-oriented investors.
Vodafone Group ADR
Vodafone is a leading mobile telecommunications provider (cellular, paging and personal communications systems) with operations in more than 30 countries and nearly 400 million customers as of December 31, 2011. The company’s 50% stake in Verizon Wireless (a U.S. wireless service provider) now accounts for almost half of its pretax profits. Meanwhile, it has been divesting minority interest holdings, most recently selling the 24% stake in Polish service provider Polkomtel, for about $1.2 billion.
Results across the globe continue to be mixed. Vodafone’s exposure to the sovereign debt crisis in southern Europe (particularly Italy and Spain), and the related economic difficulties, are taking a toll. Elsewhere, prospects have been brighter, with good performances in emerging markets, such as India, southern Africa, and Turkey. Furthermore, Verizon Wireless is enjoying solid gains in service revenues, while generating operating efficiencies that have enabled some expansion of margins. Nevertheless, the loss of profits from disposed-of minority interests, decreased interest income, and higher finance costs may well cause share net to decline about 5%, to $2.50, for fiscal 2012 (ends March 31st). But the bottom line stands to make a partial recovery in the next fiscal year, perhaps to $2.70 a share, based partially on our assumption of improved business conditions in southern Europe.
Vodafone’s current dividend yield of 7.6% is substantially above that of the average dividend payer in The Value Line Investment Survey. The payout is also materially higher than the entire telecom group which averages 4.9%. Over the past five years, VOD has increased its dividend by an average of 19% annually, and we expect double digit gains to continue for the foreseeable future. These shares will likely appeal to investors with an affinity for dividends.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.