Dividend investors have been looking towards the telecom industry in search of companies with good growth prospects. Investors have been attracted by inelastic demand for wireless products, combined with dividend yields above 5%. Below is my review of five companies that I believe provide an excellent starting point for research of the telecom sector. As always, use my analysis as a starting point for your own analysis.
Verizon Communications (VZ): Shares are trading around $38, which is in the middle of the 52 week average of $32.28 - $40.48. At the current market price, the company is capitalized at $106.81 billion. Earnings per share during the last year were $0.85, and it paid a dividend of $2.00 (a yield of around 5.3%).
Verizon Wireless is the largest telecom provider in the U.S., with backing from Vodafone (VOD), which is one of the largest wireless companies in the world. In an effort to continue its growth, Verizon recently reached a joint venture agreement with Coinstar (CSTR), that will give Verizon access to the video streaming and DVD kiosk industries. Verizon has also been making significant investments in infrastructure, and plans to continue 4G LTE upgrades in 2012. So far the strategy has paid off, and the company has outpaced its competitors on new subscriptions. Verizon's dividend is also attractive, in part because it pays at an inverse relationship to the stock price (i.e. investors reap the benefit of an increasing dividend if the stock price starts to fall). Verizon continues to be a U.S. powerhouse with strong growth potential, smart acquisition activity and increasing revenue.
CenturyLink, Inc. (CTL): Shares are trading around $38, which is in the mid-range of the 52 week average of $31.16 - $45.34. At the current market price, the company is capitalized at $23.48 billion. Earnings per share during the last year were $1.51, and CenturyLink paid a dividend of $2.90 (a yield of around 7.6%).
CenturyLink shareholders enjoyed some capital gains this week, as the stock price rose on news of a partnership between CenturyLink and PGi (PGI). Under the terms of the agreement, CenturyLink will offer PGi's Global Meet Online as part of the CenturyLink Web Conferencing product. The news adds support to CenturyLink's management strategy of growth through acquisition, and continues to increase CenturyLink's market share. The company has become the third largest telecom provider in the U.S., and has positioned itself for further growth in 2012. I continue to rate this company as a buy. However, options on the stock have seen a spike in implied volatility, so investors hoping to gain exposure through the options market may want to wait until volatility goes down a bit.
Frontier Communications Company. (FTR): Shares are trading around $4, against the 52-week trading range of $3.81 to $9.55. Earnings per share for the last year were $0.16, and it paid a dividend of $0.75, yielding 18.6%.
Frontier recently opened an office in Texas, which will become the operations center for the company. Frontier is gearing up for more hiring throughout the year, and expects that expansion will continue in 2012. However, the market is still a bit skittish on Frontier (as reflected in the 12% of shares that are being sold short), because the company is still struggling to integrate and retain the recently acquired Verizon assets. Nevertheless, the Verizon investment is expected to pay off, making the outlook for Frontier a little rosier for the future. If the company can continue to support the high dividend yield, Frontier remains a solid buying opportunity.
AT&T (T): The stock was trading around $30 last week, against the 52-week trading range of $27.27 to $31.94. At the current market price, the company is capitalized at $176.86 billion. Earnings per share for the previous year were $0.66, and the company paid a dividend of $1.76, yielding 5.90%.
In the U.S., AT&T has continued to benefit from strong brand recognition, which has made it the second largest U.S. provider. AT&T posted strong subscription numbers this quarter and continues to be the leader in iPhone sales; although the iPhone might be turning into the company's albatross. AT&T has been forced to heavily subsidize the phone, which has cut into bottom line revenues, and the iPhone requires expensive investments into infrastructure to keep up with the data requirements. Furthermore, AT&T is still trying to find its way after the U.S. Justice Department quashed the company's bid to acquire T-Mobile US (which would have made AT&T the largest wireless provider in the U.S.). AT&T is in the process of raising capital via bond issuance, and I can only hope that management will use the capital to invest in some sustainable growth prospects. AT&T will need to diversify away from the iPhone if it is to have any chance at maintaining a strong industry position. While AT&T is not a bad company, I think there are better opportunities within the telecom sector, so a wait-and-see approach is probably advisable.
France Telecom S.A. (FTE): Shares were trading around $15 last week, which is towards the lower end of the 52-week trading range of $14.50 to $23.70. At the current market price, the company is capitalized at $39.50 billion. Earnings per share for the last year were $1.54, and it paid a dividend of $1.37, yielding 9.2%.
France Telecom has a near monopoly in France, but has wisely embarked on a global expansion plan. The company has entered into a put option agreement with Egypt-based Mobinil's (EMOB) founder, which will allow him to sell his stake in Mobinil to France Telecom. France Telecom also has another year on the contract to manage Ethio Telecom and revenues have been rising for that venture. In the U.S., France Telecom has partnered with Sprint (S), to provide global machine-to-machine connectivity for U.S.-based Sprint business customers. The company's growth prospects and solid management decisions have made France Telecom an attractive investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.