Telecom Stocks: Dialing for Dollars

The recent sell-off in telecommunications shares has created an opportunity for investors seeking income, in my opinion. I believe four stocks are worthy of inclusion in income-oriented portfolios: Verizon (VZ), AT&T (T), Windstream (WIN) and Citizens Communications (CZN).

The first two, Verizon and AT&T, are more suitable for conservative investors. Verizon is currently yielding 4.7% and has a forward P/E ratio of 13.4. AT&T yields 4.6% and has a forward P/E ratio of 11.1. Both are mega-cap companies with solid balance sheets and ample cash flow to support a growing dividend.

Investors currently fear a price war in the wireless business. Price wars have always been a concern, even when long-distance was the “growth engine” of the telecoms (think MCI). In the past, these fears have usually led to attractive entry (buy) points. More importantly, both companies have growth opportunities in wireless and internet. Verizon appears to be gaining share from Comcast with the success of its FIOS product. And AT&T is the exclusive domestic carrier of Apple’s (AAPL) iPhone.

Investors should expect solid, but not spectacular, dividend and earnings growth from both Verizon and AT&T.

Windstream and Citizens are riskier plays. Windstream is currently yielding 8.3% and has a forward P/E of 12. Citizens is currently yielding 9.1% and has a forward P/E of 16.5. Both serve mostly rural telecom areas where the competition is generally less severe. As a result, capital expenditures are low and free cash flow is used to maximize dividends.

In its most recent quarterly earnings report, Citizens warned that the cable companies were becoming more aggressive in promoting VOIP phone service in the rural service areas. Also, the current housing slump is increasing the pace of access line losses for Citizens. Windstream, likewise, gave a weaker than expected outlook.

This is clearly a concern, but one that is manageable in the near-term. Both companies appear confident in their business fundamentals as they both announced share buybacks. Citizens plans to repurchase $200 million (5.5%) of its shares in the next 12 months, while Windstream plans to repurchase $400 (8%) of its shares by the end of 2009.

Investors should not look for dividend increases from Windstream or Citizens, but the dividends appear safe for at least the next few years.

Disclosure: none

Comments

[User 161200:]

I believe with Verizons $99 unlimited plan for cell phones that they are the stock to watch. I bought for my portfolio as I am also a customer.

Mary
www.NationalShowTicket...

2008 Mar 07 04:09 PM