Once thought of as including extremely conservative offerings, the telecommunications utility industry is faced with a rapidly changing competitive landscape and significant technological change. Consequently, change seems to be the banner cry of most companies operating in this once-staid industry. Telecommunications utility companies are therefore finding themselves in a state of flux in order to find ways to grow their once-stable businesses. Many are trying to find ways to increase their service offerings in areas such as the Internet, data and video. While others are looking to mergers acquisitions and in some cases divestitures in order to establish a foothold in the ever-changing communications environment.
As you review the historical Earnings and Price Correlated F.A.S.T. Graphs™ on each of these six utility companies, note that each company's earnings per share over the last four or five years has been under pressure. This is clear evidence validating our previous statement that this is an industry in flux. You will see a few exceptions to this, but generally the telephone pole aspect of each of these companies' business model is giving way to a wireless world. Therefore, these companies are forced to evolve into different business models, which indicates a new level of risk.
The bottom-line consideration for investing in the telecommunications utilities industry is yield. As a general rule, growth prospects are expected to be low for the majority of these companies covered in this article. However, as is often the case there are exceptions to every rule. Telephonic SAA (TEF) and Deutsche Telekom (OTCQX:DTEGY) are two foreign telecoms that could very well offer above-average growth potential. However, the primary appeal of this industry is the high current yield it currently offers.
The following table summarizes six telecommunications utility stocks that appear to be attractively valued, and lists them in order of dividend yield highest to lowest. From left to right, the table shows the company's stock symbol and name. Next, two valuation metrics are listed side-by-side, the current PE ratio followed by the historical normal PE ratio for perspective. Then the five-year estimated earnings per share growth is shown next to each company's historical EPS growth providing a perspective of the past versus the future growth potential of each company. The final four columns show the current dividend, dividend yield, the company sector and its market cap.
(Click charts to enlarge)
A Closer Look at the Past and the Future Potential
Since a picture is worth 1,000 words, we'll take a closer look at the past performance and future potential of each of our five candidates through the lens of our graphs.
Earnings Determine Market Price: The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal PE ratio line (dark blue line with*) depicts a PE ratio that the market has historically applied.
The orange True Worth™ line and the blue normal PE ratio line provide perspectives on valuation. The orange line reflects the fair value of each company's earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company's stock relative to its fair value. The blue line represents a trimmed historical normal PE ratio (the highest and lowest PEs are trimmed). These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.
About Telefonica: Directly from its website
Telefónica is one of the world leaders integrated operator in the telecommunication sector, providing communication, information and entertainment solutions, with presence in Europe, Africa and Latin America.
Telefónica has one of the most international profiles in the sector with more than 60% of its business outside its home market and a reference point in the Spanish and Portuguese speaking market.
The consensus of 1 leading analyst reporting to Capital IQ forecast Telefonica's long-term earnings growth at 13%. Telefonica has high long-term debt at 62% of capital. Telefonica is currently trading at a P/E of 5, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Telefonica's True Worth™ valuation would be $105.28 at the end of 2017, which would be a 40.3% annual rate of return from the current price.
Frontier Communications Corporation (NASDAQ: FTR offers voice, High-Speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications for medium and large businesses in 27 states and with approximately 15,250 employees based entirely in the United States.
The consensus of 7 leading analysts reporting to Capital IQ forecast Frontier Communications Corp.'s long-term earnings growth at 3.5%. Frontier Communications Corp. has high long-term debt at 62% of capital. Frontier Communications Corp. is currently trading at a P/E of 19, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Frontier Communications Corp.'s True Worth™ valuation would be $4.83 at the end of 2017, which would be a 8.6% annual rate of return from the current price.
Windstream Corp. is a leading provider of advanced network communications, including cloud computing and managed services, to businesses nationwide. The company also offers broadband, phone and digital TV services to consumers primarily in rural areas. Windstream has more than $6 billion in annual revenues and is listed on the S&P 500 index.
The consensus of 15 leading analysts reporting to Capital IQ forecast Windstream Corp.'s long-term earnings growth at 4%. Windstream Corp. has high long-term debt at 111% of capital. Windstream Corp. is currently trading at a P/E of 20.2, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Windstream Corp.'s True Worth™ valuation would be $14.36 at the end of 2017, which would be a 9.8% annual rate of return from the current price.
Founded in 1894, Consolidated Communications Holdings, Inc., offers a wide range of services over its technologically advanced IP-based network, including local and long distance telephone, Digital Phone, High-Speed Internet access and Digital TV. We have a continuing commitment to offer innovative products; reliable, high-quality services and exceptional customer care. We also are dedicated to maintaining strong local ties in the same communities where our employees live and work.
The consensus of 6 leading analysts reporting to Capital IQ forecast Consolidated Communications Holdings, Inc.'s long-term earnings growth at 2.0%. Consolidated Communications Holdings, Inc. has high long-term debt at 92% of capital. Consolidated Communications Holdings, Inc. is currently trading at a P/E of 20.6, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 17.4. If the earnings materialize as forecast, Consolidated Communications Holdings, Inc.'s True Worth™ valuation would be $14.40 at the end of 2017, which would be a 5.7% annual rate of return from the current price.
About Deutsche Telekom: Directly from its website
Deutsche Telekom is one of the world's leading integrated telecommunications companies with more than 128 million mobile customers, about 35 million fixed-network lines and approximately 17 million broadband lines (as of September 30, 2011). The Group provides products and services for the fixed network, mobile communications, the Internet and IPTV for consumers, and ICT solutions for business customers and corporate customers. Deutsche Telekom is present in over 50 countries and has around 238,000 employees worldwide. The Group generated revenues of EUR 62.4 billion in the 2010 financial year - more than half of it outside Germany (as of December 31, 2010).
The consensus of 1 leading analyst reporting to Capital IQ forecast Deutsche Telekom's long-term earnings growth at 15%. Deutsche Telekom has medium long-term debt at 47% of capital. Deutsche Telekom is currently trading at a P/E of 9.8, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Deutsche Telekom's True Worth™ valuation would be $41.10 at the end of 2017, which would be a 28.3% annual rate of return from the current price.
CenturyLink is the third largest telecommunications company in the United States. The company provides broadband, voice, wireless and managed services to consumers and businesses across the country. It also offers advanced entertainment services under the CenturyLinkTM PrismTM TV and DIRECTV brands. In addition, the company provides data, voice and managed services to enterprise, government and wholesale customers in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers. CenturyLink is recognized as a leader in the network services market by key technology industry analyst firms, and is a global leader in cloud infrastructure and hosted IT solutions for enterprises through Savvis, a CenturyLink company. CenturyLink's customers range from Fortune 500 companies in some of the country's largest cities to families living in rural America. Headquartered in Monroe, La., CenturyLink is an S&P 500 company and is included among the Fortune 500 list of America's largest corporations.
The consensus of 1 leading analyst reporting to Capital IQ forecast CenturyLink, Inc.'s long-term earnings growth at 4%. CenturyLink, Inc. has medium long-term debt at 43% of capital. CenturyLink, Inc. is currently trading at a P/E of 22.6, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, CenturyLink, Inc.'s True Worth™ valuation would be $44.05 at the end of 2017, which would be a 8.7% annual rate of return from the current price.
Summary and Conclusions
With interest rates hovering near all-time lows, investors needing income are faced with very limited choices. The traditional high yield available from bonds and other fixed-income vehicles is no longer available to meet the goals of retirees needing income to live off of. Moreover, it is almost a certainty that today's low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend-paying common stocks and telecom utility stocks offer among the highest yields available from typical publicly traded operating companies. However, prospective investors should always keep in mind that there is no free lunch. Consequently, we suggest that there are two important attributes regarding telecom utility stocks that need be given very careful consideration and attention. First, is that these high yields would also imply high risk, and second, these high current yields would further suggest minimal growth potential.
On the other hand, there is one salient feature that each of the six companies covered in this article possess. Each of these companies is generating cash flows per share that are significantly greater than each company's earnings per share. Therefore, even though the payout ratios of most of the selections relative to earnings appear high, relative to cash flows per share they are low and dividends are thus well covered. Consequently, we believe that although we don't expect a lot of dividend growth from the telecommunications utility sector, we do expect that most should be able to maintain their current dividend rates for at least the next few years. In conclusion, we believe these selections are most appropriate for investors needing maximum current income today, in order to live on it, or fund their retirements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.