5 Telecom Companies That Offer An Attractive Dividend

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 |  Includes: KKPNY, ORAN, T, TEF, VOD
by: Dutch Trader

I ran a screen of telecom operators (telcos) which have a buy recommendation and offer a nice return for investors.

Relative to the broader market, the telecom sector has historically offered higher dividend yields. Cash flows in the sector are relatively high, enabling telecom operators to distribute most in the form of dividends.

From a regional perspective, dividend yields for the sector are the highest in Europe, followed by the U.S. and Asia. As a consequence of the declining stock prices, dividend yields for telecoms even increased. The sector’s expected dividend yield for 2011 is more than 10% in Europe and more than 6% in the U.S. far higher than safe-haven bond yields.

The telcos that offer the highest yields distribute 70-90% of their EPS as dividends. But when focusing on the free cash payout, the ratios are much lower. However payout levels are relatively high compared to other sectors and the most important question now is if these high dividends are in fact.

Uncertainty relates to fears of the current difficult operational conditions; these could worsen in the event of an extended soft patch. Most incumbents face intense competition and regulatory pressure in their most important domestic markets, which leads to stagnating or declining earnings. While this is already known, ongoing pressure could burden cash flows and force companies to reduce their payouts/dividends.

Despite the operational environment being challenging, Telcos will strive to fulfill dividend commitments; Telcos pay high dividends because they want to compensate investors for low or stagnating growth compared to other industries. With this in mind, several companies such as France Telecom have set minimum dividend targets for the next few years or provided detailed guidance for the dividend.

AT&T (NYSE:T)

AT&T reported good Q2 results which were a touch ahead of analysts’ expectations. Biggest surprise was the customer additions in wireless and the 3.6 million iPhone activations with 24% of subscribers new to AT&T, which underlined the right decision to sell an older version at a lower price after Verizon entered the before-exclusive market in the US. Smartphone sales of 5.6 million (best quarter ever) are also an important driver. Wireline results were a bit soft but better than expected.

The early decision of the U.S. Department of Justice (DoJ) and especially the blockage surprised. AT&T said it had no indication that DoJ will block the deal and will “vigorously contest DoJ’s challenge to the purchase in court” and asked for expedited hearing on the matter. The chances that AT&T concludes the deal fall significantly but the DoJ left a door open. It said “it is willing to discuss possible remedies to address the competitive concerns.” AT&T had agreed to pay a very generous break-up fee of USD 3 bln and additional spectrum. Given that AT&T will lose a lot of money if the deal fails, the company would try to avoid paying out DT and would concede more concessions to reach a compromise with the DoJ. A final outcome/decision of the AT&T/T-Mobile USA deal still sees possible by the end of Q1/12.

Even without the acquisition, the company remains well positioned and attractively valued.

For some background of France Telecom, KPN and Telefonica I would recommend reading this article.

Vodafone (NASDAQ:VOD)

Fiscal Q1 (30 June) trading update came in a touch better than expected. Revenue rose 3.5% yoy to GBP 11.66 bln with organic growth of 2.3%. Service revenue was up 2.6% to GBP 10.86 bln, up 1.5% organically compared to expected 1.4%. Europe rose 1.2% (org. -1.3%, est. -1.5%) and Africa, Middle East and Asia Pacific increased 5.8% (org. 8.7%).

Europe’s weakness was caused by Spain (org. -9.9%, est. -9.4%) and Italy (-1.5%), while Germany was resilient (+0.2%) and UK even up 1.7% (est. 1.3%), supported by strong net contract adds (215k). Vodacom growth (+7.8%) was powered primarily by South Africa with a 35.4% increase in data revenue. Main drivers in other regions were India (+16.8%) and Turkey (+32.1%).

In Vodafone's outlook 2011, they confirmed their previous forecast of adjusted operating profit of GBP 11.0-11.8 bln. EBITDA margin is seen lower (but pace of decline below 2011) driven by weakness in Southern Europe. Free cash flow is anticipated in the range of GBP 6.0 to 6.5 bln. Capital expenditures should remain flat).

The board of Verizon Wireless has approved the payment of a USD 10 billion (GBP 6.1 bln) dividend. As a 45% shareholder in Verizon Wireless, Vodafone’s share of the dividend will be USD 4.5 bln (GBP 2.8 bln). The dividend is due to be paid on 31 January 2012.

Vodafone intends to pay a special dividend of GBP 2.0 bln, equivalent to 4.0 pence per share, to Vodafone shareholders in February 2012. Details of the dividend timetable will be communicated with Vodafone’s interim results on 8 November 2011. The balance of the proceeds will be retained to reduce net debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.