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The telecommunications industry has exploded in the past 25 years, going from large, limited phones to today's ultra-small, high-tech models. The economy of scale for the industry has grown as well, with total revenue of $1.7 trillion in 2008 expected to swell to $2.7 trillion in 2013. Investing in these companies can be extremely profitable, as long as you know what type of investment you seek.

Dialing up a Great Mixed Stock

Telecom stocks have enjoyed a great reputation. Many companies combine rising share prices and hefty dividends to make a great holding. Like any other business sector, not all wireless companies are created equal, and we have to do some research to decipher the financial numbers.

Since the difference between these companies is often razor-thin, I will use several criteria to tell Sprint Nextel (NYSE:S) from AT&T (NYSE:T), or Vodafone Group (NASDAQ:VOD) from Verizon Communications (NYSE:VZ). Several of the metrics I will use are:

  1. Past performance
  2. Dividend and yield
  3. Share price growth
  4. Debt and cash
  5. Current developments

Looking Back

Performance in 2011 most definitely did not turn out how the big wireless providers had envisioned. None of the companies reported earnings for the year, while Vodafone recorded an 11.4% decline. Year-to-year revenue improved for each of the companies, with AT&T recording a 3.6% gain, Vodafone a 4.1% increase, Sprint with 5.1% and Verizon at 7.7%.

Trailing price to earnings ratios reached staggering highs for AT&T and Verizon, both which saw the number soar over 45. While the companies look optimistically at forward P/E's of less than 13, I see this being another difficult year for providers, with competition and infrastructure expenses putting pressure on businesses already be forced to compete with lower prices.

Looking for Sure Money

One of the best features of the telecom industry are the dividends. These companies typically generate returns that keep investors coming back. Three of these four companies pay dividends, with Sprint Nextel being the only exception. Of the three payers, Vodafone offers the least ($0.95 for a 3.5% yield), while Verizon is at $2.00 for a 5.2% yield and AT&T at a yield of 5.7% on a dividend of $1.76. With a share price of just over $2, the lack of a dividend (the company hasn't paid one since 2007) may not be a big loss of funds, but it is a psychological blow because it lacks something the competition is providing.

Getting Your Fair Share

Share price changes over the past 12 months varied widely, going from Sprint Nextel's 48% loss to AT&T's 9% gain. AT&T and Verizon are trading near the top of their 52-week ranges. Sprint is, once again, lagging behind. The stock price is about 90% less than the other three and close to the bottom of its 52-week high. The company is bleeding money right now, and its share price reflects that struggle.

Taking It to the Bank

Money can overcome a lot of bad news for a company, since it counteracts debts and makes growth and expansion possible. Once again, we find three companies that have got their cash and their debts in order, and once again, Sprint Nextel is not one of them. While the company has $5.6 billion in total cash, its total debt has soared over $20 billion, giving the company a whopping debt to equity ratio of 177. AT&T, Vodafone and Verizon all have debt ratios below 65, with Vodafone sitting at a low 42.

New Developments

A piece of good news that should encourage investors in Sprint is coming at the expense of both AT&T and Verizon, as both companies have "throttled" their wireless data plans. This limiting of "unlimited" bandwidth could encourage outraged customers to leave their current company and switch to Sprint, which does not have such an arrangement.

Verizon, the country's largest cell provider, is also struggling to continue its expansion. Rivals T-Mobile USA and Metro PCS (PCS) have asked the Federal Communications Commission to block Verizon from purchasing spectrum from cable companies. This move would allow the company, say its competitors, to gain an unfair advantage in the market.

Who Are You Going to Call?

While there are a number of factors involved, I believe there is a winner when it comes to choosing a telecom stock. With the exception of Sprint, the bigger telecom companies are better positioned to prosper than smaller, regionalized competitors.

That said, I am recommending Vodafone for investors who want a new holding in the sector. The company had a solid performance last year. Its price to book (1.05) is the lowest of the group, as is its debt to equity ratio. Vodafone does have a smaller dividend yield than AT&T and Verizon, but its one-year target estimate suggests 25% upside in the share price, and the company isn't dealing with the negative publicity over data transmission limits.

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