Desperately Seeking Yield Through Equities Redux: Part 4 - Telecom Stocks

 |  Includes: BCE, CTL, FTR, T, VOD, VZ
by: Philip Mause

This group of articles is designed to give investors an introduction to and basic information about the different groups of stocks which produce significant dividend yield. There has been considerable investor confusion concerning some of these groups of stocks and there are some important differences between these groups which investors should be aware of. The first article dealt with BDCs, the second article dealt with agency mortgage REITs and the third article dealt with non-agency mortgage REITs.

Another group of high yielding stocks that constantly attracts dividend investor interest is the telecom sector. I spent a good deal of my time practicing law representing various companies in this sector and I have to say that it has seen enormous change. From a tight monopoly through antitrust litigation resulting in the break up of AT&T to explosive growth in the wireless sector and, most recently, the displacement of landline telephone service by internet telephony, the only constant in the industry has been change.

Back in June, 2011, I identified 5 companies in the industry and it is interesting to see how they have done. The table below provides the price and quarterly dividend on June 19, 2011, and at Thursday's close and the current yield for Verizon (NYSE:VZ), AT&T (NYSE:T), CenturyLink (NYSE:CTL), BCE (NYSE:BCE), and Frontier Communications (NYSE:FTR) . Price data is derived from Yahoo and dividend information and yield is based on data from each company's website.

Price 6/19/11 Dividend 6/19/11 Price 3/7/13 Dividend 3/7/13 Yield
VZ $35.51 $.4875 $47.78 $.515 4.4%
T $30.77 $.43 $36.41 $.45 4.9%
CTL $39.45 $.725 $34.53 $.54 6.1%
BCE $37.86 $.5175 $45.70 $.5825 5.0%
FTR $7.87 $.1875 $4.09 $.10 9.8%
Click to enlarge

I have not included all of the companies in the industry. I have written two articles, here and here, on small telecoms and their dividends and these articles provide information on some companies not covered here.

VZ and T have followed a policy of increasing their dividends very slowly and are, thus, beginning to look similar to electric utilities which also tend to increase dividends very slowly but steadily. They each have yields that are generous by current market standards but they each have significant debt obligations and pay out a rather high percentage of earnings as dividends. They also are each heavily involved in wireless (they are the two leading companies in that industry. VZ owns a majority of Verizon Wireless and is in the process of buying out 45% minority owner Vodafone (VOD). VOD itself is an interesting investment here as it also has a high yield. VOD stock has recently moved up on the stories about the VZ effort to buy out VOD's Verizon Wireless interest. This series of articles does not generally deal with foreign companies (BCE is a notable exception) and so I will not analyze VOD here. At any rate, the wireless business of VZ and T requires constant capital investment but is still a very strong business. Landline business has been on the decline but this is offset by the introduction of broadband which enables the user to combine internet access, television and internet telephony. I think VZ and T will be able to continue slowly increasing their dividends and are attractive for yield oriented investors.

CTL and FTR are two of the smaller telecoms. CTL is heir to the old US West system and is the largest of the small telecoms. It is not a wireless carrier although it participates in the sector through resale agreements. CTL recently cut its dividend and experienced a major sell off. Both CTL and FTR are under pressure due to the erosion of traditional landline service. I think that the reduced dividends are not likely to be cut in the short term but investors must watch the trend of revenue and earnings to determine the pace and extent of erosion of the landline business.

BCE is the old Bell Canada and has prospered as the Canadian economy has grown. It has a strong position in telecom and cable in Canada and has had the fastest growing dividend in the group. It is probably my favorite investment in the group because of its strong growth potential combined with a generous dividend yield.

With the exception of BCE, I do not anticipate that stocks in this group will increase dividends at the pace prevailing in other parts of the market. On the other hand, current yields are generous and the inclusion of T and VZ in a dividend oriented portfolio will pull yield up to a more attractive level.

CTL and FTR still carry some risk although their reduced dividends seem to be reasonably sustainable. One strategy I have followed over the years is to look long and hard at a stock which sells off after a dividend reduction. In today's dividend oriented stock market, such sell offs will probably be brutal and may be "overdone." One of my best investments in the past few years was a purchase of Cedar Fair (NYSE:FUN) stock right after a dividend reduction. If an investor can analyze a company and determine that its fundamentals are sound and that the post-dividend reduction sell off is overdone, then a contrarian purchase of a stock after such a sell off can pay off very well. CTL has recently had a sell off and may be becoming attractive at the new, reduced price level.

I am not done kicking the tires on CTL and FTR but there are signs that they may be attractive at current levels. Investors should also be aware of consolidation in this industry which may create pops in target stocks from time to time. At this time, my recommendations would be T, VZ and BCE. I think investors should also take a look at VOD and should study CTL and FTR (as well as some of the other stocks discussed in my small telecoms articles).

Disclosure: I am long VZ, T, BCE, VOD, FUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.