With a solid end to 2011 and a bullish January so far, it appears that the market is overbought on a fundamental basis. However, there are five stable, dividend-paying telecom companies selling at a discount to peers that are trading at a discount on a relative value basis with above-average volume in the past few weeks. Aside from displaying these momentum and value-based characteristics, it is worth noting that all five are yielding well over 4%. Within the traditionally low-beta of the telecom sector, investors can expect to enjoy a smoother ride should the market head south later in the first quarter.
Siemens AG, (SI) - At $97, Siemens has rebounded nicely off of its 52-week low of $84.60, set late last year. This is still $40 away from the 52-week high of $146.74 set last May, which gives this large conglomerate room to run. Siemens' solid operating margin of 11%, off of a gross margin of 30%, is comparable with its main competitor, General Electric (GE), with a 29% gross margin from an operating margin of 13%. As Siemens continues to experience downward pressures from the continued macro-economic weakness in Europe, it leaves me to speculate that the company could conduct an additional share buyback in its upcoming earnings call. At the very least, insiders may start to accumulate shares should the yield continue to hover around 4%. If you have a long-term outlook the company's impressive 16.65% five-year dividend growth rate is enticing. Yet, if you prefer a shorter-term play, you may want to go with its well known and higher-yielding competitor, General Electric (GE). Although the two competitors have almost identical betas (1.7 for Siemens and 1.9 for General Electric) I believe that the uncertainty in Europe will almost certainly rise in the near future to create greater artificial pressure on Siemens' stock price. Nonetheless, on a valuation basis, this stock has significant upside.
AT&T, Inc. (T) - AT&T has enjoyed a nice ride upward since it dipped below $28 last November as investors quickly swooped in to accumulate shares producing a 6% yield. Since then, AT&T has ditched plans to acquire T-Mobile. AT&T has been placing great emphasis on expanding the availability of its 4G network along the East coast in areas such as Washington D.C., and Baltimore. In other words, AT&T is playing catch up. It is no secret that within the oligopoly of wireless carriers, Sprint Nextel (S) can accommodate an array of new customers on its nationwide 4G network. 4G, meaning fourth generation of wireless standards, promises better coverage and faster speed. Although AT&T's operating margin of 16% is slightly less than its largest competitor, Verizon Communications (VZ), at 22%, it is well above Sprint Nextel's operating margin around 2%. With the security and longevity of the above average dividend, accompanied by a strong balance sheet, AT&T is still poised for strong gains in the coming months.
Vodafone Group PLC, (VOD) - This massive telecom holding company that spans four continents is currently yielding over 3% while trading around $27 at the time of this writing. It trades right between its 52-week low of $24.31 and 52-week high of $32.70. With its 45% ownership interest in Verizon Communications , Vodafone has a strong interest in expanding the network and working to compete with its major stateside competitors, Sprint and AT&T. With over 70% of revenue derived from Europe, Vodafone last year took advantage of the financial unrest by purchasing 14.6 million common shares (1.46 million ADSs) on the London Stock Exchange. With a P/E of 13.13, well below the industry average, and operating margins of 14.49%, there is no reason to wonder why Vodafone is actively buying its own shares. Even with a possible continued slowdown in Europe, Vodafone's impressive emerging market division will allow it to increase the dividend over the long term. In order to gain exposure to emerging market growth as well as the steady income stream that flows from more developed nations, I would transition out of Verizon and into Vodafone.
Telefonaktiebolaget LM Ericsson, (ERIC) - At this time ERIC is trading around $10, just off its 52-week low of $8.83 set in the first week of October. The company has slowly retraced from its 52-week high of $15.44 set on in May to yield an impressive 3.5%. There is plenty of cash on hand, $11.40 billion to be exact, which is significantly higher than its competitors. Alcatel-Lucent (ALU), with less than half that amount at $4.87 billion, lacks the ability to offer investors the benefit of a dividend. Ericsson has long held a 50% stake in Sony Ericsson Mobile Communications, which Sony (SNE) has recently agreed to purchase for $1.35 billion. I see this acquisition of the mobile unit by Sony a blessing in disguise for Ericsson. This should prevent Ericsson from feeling the same pressures as rival Nokia (NOK), due to continued competition from Google (GOOG) and Apple (AAPL). If you're looking for a solid long-term dividend with some growth potential then you can't go wrong with Ericsson. I believe that persisting European debt worries could push the price back into the $9.50 - $9.75 range, which is where this would make ERIC an ideal candidate for a balanced portfolio.
Tele Norte Leste Participacoes S.A., (TNE) - As with several of the other companies mentioned in this article, Tele Norte is slightly above its 52-week low of $8.72 set on in early October. However, shares are still well below their 52-week high of $19.22 set in late April. Still rebranding after the Brasil Telecom acquisition, Tele Norte is poised to provide strong growth throughout Brazil's booming economic expansion over the coming years. Don't be enticed into this name merely by the 5% dividend yield, however. While the dividend payout ratio is around 72%, and therefore at a sustainable level, I think a growth path is likely. Tele Norte is in a growth stage, and it has an impressive operating cash flow of $4.6 billion that should allow it to meet obligations without incident. Tele Norte's expansion is also enhanced by a new law in Brazil, implemented in September 2011, aimed at deregulating the telecommunication industry. This will require a significant investment on the company's part but should handsomely reward shareholders in the future.