Telecom Stocks Roundup

Includes: CTL, ORAN, SPY, T, VOD, VZ
by: Bennington Investment Ideas

Although the new year is just a few weeks old, Frontier Communications Company (NYSE:FTR) continues to disappoint investors. While it carries a sky high dividend yield, its year-to-date price decline more than offsets any benefit that investors receive from its first quarterly dividend, which should be declared in early March. Despite management's guidance that the integration of the Verizon Communications (NYSE:VZ) wireline assets continues on plan and the targeted cost savings are being achieved, the stock price continues to slip lower, especially in comparison to other telecommunications stocks:

Telecom Stock Performance
Ticker Name 2011 Performance 2012 YTD Performance
FTR Frontier Communications Company -41.1% -5.4%
FTE France Telecom S.A. -17.9% -4.6%
CTL CenturyLink, Inc. -13.2% 2.0%
T AT&T Inc. 9.0% 0.9%
VOD Vodafone Group Plc 14.3% -1.0%
VZ Verizon Communications Inc. 18.2% -2.9%
Source: Yahoo!Finance, Returns include dividends.

However, as the table above shows, FTR is not the only stock in decline. France Telecom S.A. (FTE) and CTL, which also have substantial wireline businesses, also struggled last year. In contrast, the best performer in 2011 was VZ, which had sold its wireline assets to FTR. The SPDR &P 500 Trust ETF (NYSEARCA:SPY) was up just its dividend for 2011 or 1.9%; however, this year SPY is already up 4.8%, far outpacing all of these telecom stocks.

I believe that FTR is largely disadvantaged in its business. As people cut the cord and move from wireline phones to wireless, FTR and similar companies like CenturyLink (NYSE:CTL) should continue to suffer. FTE also offers wireline in addition to mobile, data and internet services. One partial offset to this is that FTR offers satellite television and high speed internet access. In theory, it can sell these services to its existing wireline customer base, which continues to decline.

Furthermore, FTR has significant leverage that could create additional drag on the stock.

Ticker Market Capitalization ($B) Enterprise Value ($B) EV/MC Price to Book
VOD 141.9 185.9 131% 1.07
FTE 39.6 81.1 205% 1.09
FTR 4.9 12.8 265% 1.02
T 180.8 241.3 133% 1.59
VZ 110.3 154.4 140% 2.83
CTL 23.4 44.5 190% 1.05
Source: Yahoo!Finance, Author calculations

The first observation is that FTR has the highest leverage among these stocks, substantially higher than FTE and CTL which are also focused on wireline businesses. In most cases, these stocks have market equity values that are reflective of their book equity values. The two exceptions are VZ and AT&T Inc. (NYSE:T). When I view a company, I am more inclined to look at enterprise value since this is the value reflecting the assets and operations of the business before leverage. For example, if one were to look at the number of customers or subscribers, the appropriate comparison value is enterprise value since the money earned from those subscribers is also used to pay off the debt.

So why do investors even consider FTR? The following table shows the answer:

Forward Dividend Yield
Ticker 1/20/2012 Closing Price Forward Dividend Yield
FTR 4.87 0.75 15.4%
FTE 14.94 2.12 14.2%
VOD 27.76 2.21 8.0%
CTL 37.95 2.90 7.6%
T 30.51 1.77 5.8%
VZ 38.97 2.03 5.2%
Source: Yahoo!Finance for prices, Author estimates for forward dividends.

In the case of FTR and FTE, these companies pay extremely high dividend yields. However, as noted earlier, FTR might pay a high dividend yield, but its all in return has been quite disappointing. In the future, I expect that FTR's leverage will become more challenging and I will remain skeptical of this company. In contrast, Vodafone Group Plc (NASDAQ:VOD) offers an attractive yield with low leverage and a lower Price-to-Book valuation than T and VZ. In 2011, it delivered a positive performance as well, along with T and VZ which primarily provide wireless service. Furthermore, VOD owns 45% of VZ, representing over one third of VOD's equity market capitalization.

Disclosure: I am long SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.