Dividend stocks have been a great way for investors to generate income. Thanks to extremely low interest rates brought forth by the Federal Reserve, it is nearly impossible to generate meaningful returns from money market and other savings accounts. This is what has pushed many dividend stocks to new 52-week highs recently, and that means the yields are lower and valuations could be stretched. For this reason, it makes sense to consider stocks of companies that are based outside of the United States where yields are often higher.
The increasingly lofty share prices for some popular dividend stocks has started a debate over whether there is a dividend bubble building. One analyst at Alliance Bernstein (AB) recently stated that stocks like Verizon (VZ) shares are getting expensive as it now trades at around 17 times earnings, and with a yield of about 4.7%. AT&T (T) trades at a similar valuation, with a PE ratio of about 16, and a yield of 4.8%.
Telecom stocks have historically been one of the highest-yielding sectors and investors have enjoyed the stable cash flows and defensive business models that these companies offer. However, over the past few months, these stocks have been acting more like growth stocks. Shares of AT&T have jumped from a 52-week low of about $27 per share to a recent $38. Verizon shares have surged from a 52-week low of $34 to a recent $46 per share. While these are solid companies with still respectable yields, at current levels, there might not be much more upside in the share price. If interest rates were to rise, these stocks could even see downside risks accelerate.
Going forward, investors should consider being more cautious with stocks like Verizon and AT&T, and consider foreign telecom stocks like Vodafone (VOD) which appears to offer a lot more value. Vodafone has a lower PE ratio, a higher yield, and it also looks more attractively valued when considering book value. Verizon has a book value of about $13.04 per share, which means it sells for more than 3 times book value, AT&T has a book value of $17.79 per share, which means it sells for about double book value, but Vodafone trades for just a slight premium to book value, which is $24.62 per share.
Vodafone Group, PLC is based in the United Kingdom and it provides telecommunication services in a number of countries around the world. It has over 400 million customers, and it operates in more than 30 countries and has partners in over 40 more. It offers mobile phone, fixed line and broadband services to businesses and consumers. Vodafone recently reported solid financial results and it is seeing strong growth in emerging market countries. Revenues were up about 16.2% in India, and 18.7% in Turkey. Although revenues from some countries in Europe like Spain and Italy are under pressure, Vodafone is seeing growth of about 4.2% in Germany.
Another important factor to consider is that Vodafone owns about 45% of Verizon Wireless, and that makes it a way to play Verizon shares, for less. (Vodafone trades for about 11 times earnings versus a price to earnings multiple of about 17 for Verizon.) Here is a closer look at valuation of all 3 of these telecommunication companies, which provides more details on why Vodafone shares appear to be a relative bargain for income investors to consider:
Key Data Points For Vodafone From Yahoo Finance:
- Current Share Price: $28.48
- 52-Week Range: $24.31 to $30.07
- Dividend: $1.98 per share which yields about 7%
- 2013 (fiscal year) Earnings Estimate: $2.56 per share
- 2014 (fiscal year) Earnings Estimate: $2.62 per share
- P/E Ratio: about 11 times earnings
Key Data Points For Verizon From Yahoo Finance:
- Current Share Price: $44.01
- 52-Week Range: $34.65 to $46.41
- Dividend: $2 per share which yields about 4.6%
- 2012 Earnings Estimate: $2.49 per share
- 2013 Earnings Estimate: $2.82 per share
- P/E Ratio: about 17 times earnings
Key Data Points For AT & T From Yahoo Finance:
- Current Share Price: $37.33
- 52-Week Range: $27.29 to $38.28
- Dividend: $1.76 per share which yields about 4.8%
- 2012 Earnings Estimate: $2.40 per share
- 2013 Earnings Estimate: $2.57 per share
- P/E Ratio: about 16 times earnings
Data is sourced from Yahoo Finance.