Dividend investors often think of phone and wireless companies in the same way they think of utility companies. The motivation for this is that these companies tend to engage in infrastructure spending and then collect fees for using that infrastructure. Some of the allure of these investments may be a hope for role reversal: Many consumers feel helpless in that they must select some provider from these industries to be part of modern society.
Unfortunately, these are just feelings. Telecoms (I include wireless companies when I use that word) are not really utility companies. They don't have government monopolies and they often undertake capital expenditures to stay modern. Older equipment gets written down, resulting in expenses.
With this in mind, it shouldn't come as a surprise that telecoms fail to pay back their investors in short time frames. Only four telecoms were forecast to pay back initial investment directly within two decades (more on that below).
Calculating Payback Periods
The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out later in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making it worth more.)
Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and the dividend was projected by taking the minimum of the following:
Earnings growth over the past five years
Analyst estimates for earnings growth for the next five years
Return on equity times the earnings reinvestment rate
The minimum of these measures was then used to estimate dividend growth for the next three years.
Telecom stocks were screened for dividend payback within two decades, dividend yields in excess of the 10-year Treasury yield and payout ratios below 60%. The values of these inputs are provided below:
EPS Growth Past 5 Years
EPS Growth Next 5 Years
Atlantic Tele-Network, Inc.
BT Group plc
China Mobile Limited
Nippon Telegraph & Telephone Corp.
Rogers Communications Inc.
SK Telecom Co. Ltd.
USA Mobility, Inc.
Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)
There are only four telecom sector stocks than utilities stocks with payback periods inside of two decades:
Return on Equity
Many investors may be surprised to find out that there are only eight telecom stocks that fit these criteria. The big telecoms like AT&T (NYSE:T) that you may have expected on this list did not have sustainable dividend payouts.
Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback based on dividend payments could take.
If you want to ignore what prices your securities fetch in the markets, you could be waiting a long time to get paid back. Since all the dividend telecom stocks require more than a decade for payback, investors should rethink a singular focus on dividends before investing in the telecoms.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.