We have constructed a portfolio of U.S. telecom stocks that offers investors a unique mix of dividends and growth. We recommend equal positions of 25% in the stocks of Sprint (S), Crown Castle (CCI) and CenturyLink (CTL), while underweight positions in AT&T (T) (15%) and Verizon (VZ) (10%). This portfolio has the potential to offer investors risk minimization through diversification, as well as return enhancement. Investment in this portfolio could provide capital gains of almost 25% in a bullish scenario with income potential through dividends of over 3%, well over the current 10 year treasury yields. The portfolio's beta is 0.65, reflecting the low level of market risk from investing in this portfolio.
Note: This is Qineqt's telecom portfolio. The weights do not represent an overall equity portfolio recommendation.
Sprint Nextel Corp.
Sprint offers various wireline and wireless services to its customers, which include residential and corporate clients, as well as government agencies. It is the third largest telecom carrier after Verizon and AT&T, based on its wireless revenues, which contribute over 90% to the company's revenue stream.
Despite the company reporting net losses in the first quarter, it was able to provide a healthy earnings surprise of almost 30%. There was some revenue growth as well, largely due to its wireless segment outperforming in the quarter. The wireless segment grew by over 7% in terms of revenues. The Sprint platform continues to show improvement YoY, with its postpaid average revenue per user growing by a record breaking $4.03. During the quarter, its Sprint platform postpaid subscribers grew by 4%, compared to the previous year's quarter. Rapidly increasing demand for iPhones is causing a rise in the company's sales; the company sold over 1.5 million iPhones in 1Q2012. Moreover Virgin Mobile, with its sale of iPhones on a prepaid package, is likely to be the growth driver for the company going forward.
The company has strong financials, as reflected in its balance sheet, with sufficient cash flows to meet its liquidity and capital expenditure requirements. Sprint has consistently provided healthy earnings surprises, and is expected to report positive earnings in 2014, with earnings growing by over 6% in the next five years. Sprint's wireless business will drive the company's growth in the future, and we believe that a strong demand for smartphones, prepaid iPhone sales, and 4G expansion, will be positively reflected in the company's financials as well as stock price.
Click here for a more detailed analysis on Sprint.
Crown Castle International Corp.
Crown Castle operates and leases wireless infrastructure for the benefit of telecom companies. It is a $17.4 billion-worth company, with a fairly liquid stock. It has operations in the U.S. and Australia.
The company has been posting good, consistent revenue growth, both on a yearly and quarterly basis. In the first quarter, revenues improved by 10% compared to the same quarter of the previous year, and an almost similar growth in revenues was seen in the year-end revenues. Moreover, CCI has been consistently expanding its margins YoY, driven mostly by the growth in its site rental revenues, which represents a major chunk of the company's revenue stream. Constant fixed costs and a rise in tenants are major contributors to the margin expansion of the company's site rental business. We expect its site rental business to exceed expectations, as we believe that leasing demand from companies like AT&T and Verizon will drive the segment's growth, as they continue to proceed with their expansion plans.
The company has higher margins than most of its peers, and little operational risk. Moreover, in the year ended 2011, CCI was able to turn around its losses into profits, despite a hike in its expenses compared to the previous years. The company's earnings are expected to grow by 20% in the next five years, largely due to the exceptional performance of its site rental segment. With rising demand from telecom companies, we expect the company's revenues and earnings to grow. Crown's stock has performed well recently and is one of the better performers of the portfolio in terms of YTD price upside. The above mentioned reasons lead us to make this stock a part of our telecom portfolio.
For a detailed analysis on Crown Castle, click here.
CenturyLink, another major telecom company, with a market capitalization of $25 billion and an impressive dividend yield of 7.40%, offers investors with a possible 30% price appreciation potential. CTL offers data and video services to its customers in the United States.
The company is growing rapidly, which is evident from its 2-year revenue CAGR of 75%. An increase in the subscription base for Prism TV, as well as high demand for its broadband services, is driving the company's growth. We expect this demand to continue going forward and further boost the company's top line. Moreover, CTL is doing well by integrating its various recent acquisitions (Savvy and Qwest), and we expect the synergy benefits from these acquisitions to enhance the company's competence. CTL beat the consensus earnings estimates in the first quarter, providing an earnings surprise of 17%. Moreover, its earnings are expected to grow by almost 12% in the next five years. A high dividend yield of 7.4%, well backed by its free cash flow yield of almost 12%, offers a great income opportunity for investors. The company paid $1.6 billion in dividends in the year ended 2011, and generated CFOs of over $4.2 billion, indicating its ability to sustain its dividend payout. Because of its attractiveness from a dividend standpoint, and the growth prospects in Prism TV and Broadband services, we recommend including CTL in the portfolio.
For a detailed analysis on CTL, click here.
AT&T provides wireline and wireless services to a wide range of users, including consumers and corporate customers. It has a market capitalization of almost $210 billion and is fairly liquid, which is evident from its average volume and low bid ask spread.
T's wireless segment has performed well in the recent years, and now represents almost half of the company's revenues. High smartphone sales have helped the company in boosting its revenues, as well as profits. Moreover, lower churn rates and higher average revenue per share, quarter after quarter, have brought about growth in its financials. The wireline segment's revenues slightly declined, due to a decline in the traditional landline usage by consumers, however, an impressive growth of 25% in the company's U-verse video subscriptions offset the losses from voice services. Going forward, we expect U-verse to be the growth driver for the company because of its affordability and product attractiveness.
It offers an attractive dividend yield of 5%, which is well over the current treasury yield of 1.67%. T has been able to generate healthy cash flows from its operations on a consistent basis, and it has sufficient cash balance as well to support its high dividend payout. The company was able to give a positive earnings surprise in the first quarter. Moreover, its earnings are expected to grow by 10% in the next five years.
The company's strength in both wireline and wireless businesses, and a strong growth potential coupled with its dividend income, make it a valuable stock to hold in the portfolio.
Click here for a more detailed analysis on AT&T.
Verizon Communications Inc.
Verizon offers data, voice, and entertainment services to its customers. It has a market capitalization of almost $127 billion and is a fairly liquid stock in terms of average volume and a low bid ask spread.
The company's revenues are on a consistent upward trend and in the financial year ended 2011, its revenues grew by over 4%. VZ also has higher margins than its peer AT&T. Overall, the latest results compiled by the company came in positive, with its wireless segment growing by almost 8% in terms of revenues. Average revenues per user are on an upward trend, and now with its 4G LTE expansion plans, we expect a further strengthening of its position. Verizon's wireline business showed a slight weakness in the first quarter, with losses from voice revenues persisting, however, its FiOS revenue growth more than offset the aforementioned losses, growing by almost 20% YoY. We expect the company's FiOS TV, internet and phone plans to continue to do well going forward, and bring stability to its wireline operations. Verizon's fundamentals are strong, which are visible in the increase in the subscription base and higher ARPUs.
The stock offers an attractive dividend yield of 4.5%, which is well backed by its free cash flow yield of over 7% and free cash flows of $9 billion. Moreover, the company has been able to consistently generate healthy cash flows from its operations, which is another indication of its ability to sustain its high dividend payout. Verizon's earnings are expected to grow by almost 11% in the next five years.
We maintain our stable outlook for Verizon and believe that it has the potential for further growth in revenues and earnings, led by the sale of more smartphones, its expansion in the 4G long term evolution technology, as well as the impressive FiOS revenue growth. Moreover, its lucrative dividend yield makes it a valuable addition to the portfolio.
Click here for a more detailed analysis on Verizon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.