|Ticker||Name||Market Cap ($ billions)||Dividend Yield||Dividend Amount||Timing|
|PT||Portugal Telecom SGPS, S.A .||7.8||19.4%||Irregular||Annually|
|CEL||Cellcom Israel, Ltd.||2.6||10.4%||Irregular||~Quarterly|
|PTNR||Partner Communications Company Ltd.||2.3||10.2%||Irregular||~Quarterly|
|FTR||Frontier Communications Company||7.8||9.6%||Regular||Quarterly|
|FTE||France Telecom S.A.||54.4||7.8%||Irregular||Quarterly|
|CHT||Chunghwa Telecom Co Ltd||27.9||7.6%||Irregular||Annually|
|TSP||Telecomunicacoes de Sao Paulo S.A.||10.2||6.6%||Irregular||~Semi|
|TEO||Telecom Argentina Stet - France Telecom S.A.||5.1||6.0%||Irregular||Semi|
|VZ||Verizon Communications Inc.||106.3||5.2%||Regular||Quarterly|
|TMX||Telefonos de Mexico||7.8||5.1%||Slightly Irregular||Quarterly|
|TI||Telecom Italia S.P.A.||17.5||4.7%||Irregular||Annually|
|PHI||Philippine Long Distance Telephone Company||10.6||4.7%||Irregular||Semi|
|NZT||Telecom Corporation of New Zealand Limited||4.3||4.4%||Irregular||Quarterly|
|TLK||P.T. Telekomunikasi Indonesia, Tbk.||17.4||3.7%||Irregular||Semi|
|TNE||Tele Norte Leste Participacoes S.A.||5.5||3.3%||Irregular||~Annually|
|BT||BT Group plc||26.4||3.2%||Irregular||Semi|
|TSU||Tele Celular Sul Participacoes S.A.||12.3||2.5%||Irregular||Annually|
Irregular refers to stocks that pay dividends that appear to be linked to financial performance while regular refers to stocks that pay fixed amounts with some escalation. These stocks are more at risk for having misleading dividend yields depending on calculation methodology. In reviewing Yahoo!Finance, Dividends.com, Zacks.com, and Edgar, I found that all these sources can be subjected to criticisms in terms of how they calculate dividend yields. Ultimately a dividend investor should always do their own research by reviewing the dividend history for any red flags. The next level is fundamental analysis to determine if the current dividend payments are sustainable. If the timing has a tilde in front of it, it implies that the timing is relatively close to the frequency listed, but ex-dividend dates may fluctuate by up to a few weeks.
For adherents to aspects of Modern Portfolio Theory (MPT), the equity hurdle rate can be calculated using the Capital Asset Pricing Model (CAPM) which is:
- It is a historical calculation instead of a forward looking estimate.
- It is a singular definition of risk based on return volatility. Risk is a much broader concept that encompasses the notion that there are numerous possible states of the future, but that only one will occur.
|Ticker||Risk Free rate (a)||Beta (b)||Equity Risk Premium (c)||Hurdle rate =(a) +(b) x (c)|
Many Communication Service companies have Beta’s below 1 which result in very low hurdle rates, since the 10-year Treasury bond is at 2.964%. As mentioned before, the hurdle rate can be achieved through either dividend yields or price appreciation. The first step is to estimate the forward dividend yield based upon the current dividend yield and expected dividend growth. The growth was estimated from the 5 year historical dividend growth with a 15% cap. If the historical dividend growth was not available, I estimated it based upon the recent dividend history. The dividend growth rate is the most difficult estimate to make and does introduce some error into the calculations.
|Ticker||Dividend Yield (a)||Estimated Dividend Growth (b)||Estimated Forward Dividend Yield =(a)x (1+(b))|
Already, it is becoming clear that some stocks should have expectations of very low price appreciation since the forward dividend yield is almost the same as the hurdle rate. For FTR and PTNR, the forward dividend yield is actually substantially higher than the hurdle rate. This indicates that growth prospects, and hence price appreciation, are low for the company. Companies that pay out substantial dividends are retaining less cash in their business that can be re-invested for growth. The following table quantifies the expected price appreciation for each stock. Stocks with negative expected appreciation will also have a Dividend yield above 100% suggesting that the dividend provides a return in excess of the total return.
|Ticker||Hurdle rate (a)||Forward Dividend Yield (b)||Implied Price Appreciation =(a)-(b)||% Dividend Yield =(b)/(a)|
This table also gives the estimate of what percentage of the hurdle rate is achieved through just the forward dividend yield. While some stocks might offer solid dividend yields, for many Communication Services stocks this should be close to the only return. An investor should not expect substantial price appreciation and in some cases should not be surprised if the stock price declines. In looking at previous sources of error on possible dividend yields and growth estimates, it is still clear that some stocks would show an expected negative price appreciation, which supports the overall thesis. However, some of these stocks, like BT and NZT, show hurdle rates that are greater than the forward dividend yield, suggesting that investors should expect some price appreciation.
Some of these stocks look more like bond investments, where the dividends are discounted at an appropriate rate to give the value of the stock. Whether or not the fundamentals of any specific company are solid, MPT suggests that many of these stocks will have declining prices in the future. This leaves the question of whether an investor would be satisfied with the expected dividends to offset some capital losses.
Disclosure: I am long SPY.
Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.