Buy NTT to Hedge Your Dollars (NTT)

| About: Nippon Telegraph (NTT)

Andrew Schmitt of Nyquist Capital wrote about a strategy of buying a position in Nippon Telegraph & Telephone Corp (NYSE:NTT) as a way to hedge your dollars and also hopefully benefit from NTT's cost cutting and launching of new services. I like his thinking and mostly agree with him. But it's not clear that NTT is attractive now, since it has been on an uptrend and there may be little upside left. Here are my thoughts on NTT:

The negatives about NTT are that its fixed-line telephone business is shrinking, and it incurs heavy costs in marketing and promoting its high-speed Internet business unit and NTT DoCoMo (NYSE:DCM). NTT is also going to start feeling pressure from the growing presence of triple-play cable TV operator Jupiter Telecom (JASDAQ: 4817).

It has a modest dividend yield of 1.00% although that should increase with a planned dividend payout hike on the horizon. You can't get too excited over it though and expect it to give you much downside protection as you could with the 5% yields of Verizon (NYSE:VZ) and AT&T (NYSE:T).

The good about NTT is its dominant market share in fixed-line and cellular phones. It invests heavily in R&D and technology and ultimately these efforts should boost the top and bottom lines as adoption rates increase (especially for high-speed internet) and costs are contained.

Schmitt of Nyquist Capital mentioned NTT has little foreign market exposure, which for a currency hedge is a plus but for the profitability of the company in a nation like Japan is a negative point. The reason is that Japan has a stagnant population. Even though the population totals nearly 120 to 130 million depending on estimates, it's one that is increasingly disconnecting the fixed-line phone. NTT DoCoMo controls a majority market share in cell phones but there is little room for growth as there are over 90 million subscribers to the nation's top three service providers.

As a short-term currency hedge I don't see too much downside with NTT except for a reversal in the yen/US$ rate itself due for instance to the Fed deciding on continued rate hikes against an overly cautious Bank of Japan that may opt not to raise rates.

Further upside exists in the ability of NTT to reorganize against the wishes of rivals and even the U.S. government as a unified entity. Monopolies are bad for consumers and competitors but typically good for shareholders.

Despite reporting a 30% drop in fiscal year net income last Friday, NTT's ADRs are trading higher (+3.71% at $25.16) at the time of this post. The reason for the surge seems to be based on NTT trading up in Japan in its first trading since its earnings release. Projected net income for the current fiscal year is basically unchanged over its prior fiscal year but the key point may be that it's not expected to drop any further.

NTT 1-yr chart: