With improvements in mobile technology and the excitement circulating around new product launches such as Apple's (APPL) iPhone 5, the telecom sector has outperformed much of the market this year. Clearly, mobile Internet use has skyrocketed as consumers thirst for better speed, reception, and popular new products. This sector is best represented by the "big three" U.S. carriers: AT&T (T), Verizon (VZ), and Sprint (S), as well as the popular telecom ETFs, iShares Dow Jones U.S. Telecom (IYZ) and Vanguard Telecom Services (VOX). These ETFs contain each of these three companies, plus some other less popular, yet solid names in the industry. Let's take a look at how these stocks have performed versus the S&P 500 since September 1st:
(click image to enlarge)
As shown, they have all outperformed the market lately without accounting for dividends. But which stock is still worthy of buying after this run?
P/E Ratio ttm
|Est. Forward P/E Ratio 1 yr||47.45x||38.75x||N/A||VZ|
|Dividend CAGR 1 year*||2.33%||3%||N/A||T/VZ|
|Dividend CAGR 2 years*||2.35%||2.78%||N/A|
|Dividend CAGR 5 years*||4.39%||3.67%||N/A|
|Revenue CAGR 2 years*||1.24%||3.27%||4.97%||S|
|Revenue CAGR 5 years*||1.38%||4.17%||-2.74%||VZ|
|EPS CAGR 2 years*||-.60%||N/A||N/A||T|
|EPS CAGR 5 years*||7.03%||1.99%||N/A|
|Projected EPS growth 12 mnts.||6.1%||15.1%||45.1%||S|
|Total Debt/Total Cap. ratio||38.39%||36.68%||69.74%||VZ|
|Interest Coverage ratio||8.51x||9.69x||-||T|
*latest metric used is from most recent/payout quarter announcement
Dividend Winner: T. AT&T showed the most consistent growth, and the highest current yield, barley beating out Verizon in this category.
Revenue Winner: S. It seems Sprint's revenue has hit a trough and is starting to uptrend. With intense business model restructuring and new iPhone sales, Sprint should see revenue growth accelerate.
EPS Winner: S. Forecasts show Sprint with the largest EPS growth expectations over the next 12 months, coming in around 45% for some analysts. Even though T has outperformed in the past, it seems Sprint has the wind at its back and could really take off if this 45% projection is met.
P/E Ratio Winner: VZ. Since Sprint has no net earnings to speak of, VZ was the winner, especially looking 12 months ahead. In this regard, Verizon could be nearly 20% cheaper by the fall or 2013 vs. AT&T. AT&T did show a slightly better ability to cover interest payments as well, especially when we account for special dividends owed to Vodafone (VOD), which VZ may have to pay periodically.
Overall: Sprint definitely offers the most upside potential going forward for the aggressive investor. It has the highest expectations for EPS growth at around a 45% increase by Q2 2013, and the cheapest Price/Book. Some investors shy away from Sprint due to its high debt load and its restructuring efforts. I feel getting in on Sprint now, in what are still the early innings of mobile growth, could offer handsome rewards down the road -- if you can tolerate the leveraged balance sheet and you have a strong stomach.
For most risk adverse investors, such as retirees and dividend seekers, Sprint may not be the best choice. For this class of investor, I feel an ETF is the best way to be diversely exposed to the sector while getting a dividend along the way. In addition, for those who can't really can't decide whether to buy T, VZ or S, this alternative is also helpful. The ETF IYZ offers 36.86% exposure to these three leaders, while the ETF VOX offers 48.51% (as of 8/31/2012). Dividends with diverse exposure to Sprint, AT&T, and Verizon -- sounds good -- but which of these ETFs is the cream of the crop?
|Assets:||$627 M||$544 M||IYZ|
|Dividend Payout Frequency:||Quarterly||Quarterly||-|
|% Fund in top 10 Holdings:||41.94%||69.48%||IYZ|
|Morning Star Rank:||3-Star||4-Star||VOX|
|% allocation in the "big three"||36.86%||48.51%||IYZ|
*Some Data is as of 8/31/12, most is as of 9/28/12
It seems IYZ offers several advantageous attributes, such as slightly larger size, providing liquidity, better diversification, and a comparable yield. Even though the expense is slightly higher, it is worth the extra .28% for these benefits in my opinion. Valuation metrics are a hair more expensive, but the price/book ratio of 1.85x is still appealing, considering the price/book of VZ, T, and S are in this range. Overall, IYZ seems like a compelling alternative for the risk-averse investor seeking exposure to the telecom sector's growth expectations while collecting a decent dividend.
Telecom Demand Will Increase:
As I stated in a recent article, Cisco Systems Inc.'s (CSCO) Visual Networking Index predicts amazing growth in mobile Internet usage in the future, offering a compelling reason to stay invested long term in telecoms, despite the sector's recent run this September.
According to the report, "Overall mobile data traffic is expected to grow to 10.8 exabytes per month by 2016, an 18-fold increase over 2011. Mobile data traffic will grow at a CAGR of 78 percent from 2011 to 2016."
It is obvious mobile Internet use is just in its infancy. Considering near exponential growth going forward, telecommunication companies seem like great investments to capture this amazing growth in mobile communications.
If you are seeking exposure to the U.S. telecom sector, the "big three" U.S. companies seem like great investments, considering Cisco's forecast for immense mobile Internet demand going forward. Sprint seems best suited for the aggressive investor seeking share appreciation, while the IYZ -- with its exposure to T and VZ, as well as S -- seems most appropriate for investors seeking diversification and yield.
Although the individual advantages contained in each stock and ETF are debatable to some, the overall long-term promise for the sector as whole is undeniable. Investing in the IYZ ETF for the conservative-minded, and Sprint for the growth hungry, are both attractive ways to gain exposure to this exciting sector.
Additional disclosure: I have owned long positions in VZ and T in the past 12 months. This evaluation is not direct advice to buy/sell. You must ultimately make your own investment decisions.