Communication Services Stocks: Plenty of Dividends, Limited Price Appreciation Potential

by: Bennington Investment Ideas
Communication Service companies tend to provide very good dividend yields. Among the approximately 100 industries used by Edgar Online to classify companies, the Communication Services industry ranked fourth with a market-cap weighted average dividend yield of 4.0%. In comparison, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) provides a current dividend yield of 1.84%. However, investors in these companies might be disappointed by the price appreciation of these stocks. This article will look at stocks which were selected because they had high dividend yields and market capitalizations greater than $1 billion. Some stocks were excluded due to limited history or questionable data. The dividend yields were from and reflect their calculation methodology which does not use a trailing twelve months approach.
Communications Services Dividend Stocks
Ticker Name Market Cap ($ 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
WIN Windstream Corporation 6.5 7.9% Regular Quarterly
FTE France Telecom S.A. 54.4 7.8% Irregular Quarterly
CHT Chunghwa Telecom Co Ltd 27.9 7.6% Irregular Annually
CTL CenturyLink, Inc. 23.0 7.6% Regular Quarterly
TEF Telefonica SA 106.9 6.8% Irregular Semi
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
T AT&T Inc. 179.3 5.7% Regular Quarterly
BCE BCE, Inc. 30.9 5.2% Irregular Quarterly
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
TU Telus Corporation 8.1 4.0% 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
Data provided by services downloaded on July 22, 2011.

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,,, 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:
Hurdle Rate = Risk Free Rate + Beta x Equity Risk Premium
In this equation, the risk free rate is often approximated by the 10-year Treasury Bond and the equity risk premium is an estimated value. Analysts and researchers often put the equity risk premium between 5.0% and 7.4%. For this article, I will use 6%. The hurdle rate can be achieved through either price appreciation or dividends and this is irrespective of beliefs in MPT. Even if investors don’t subscribe to MPT, the notion that stocks carrying more risk should command a greater return in most expected cases and a substantially worse return in several other cases. (If risky stocks on average consistently provided higher returns, they would not really be risky.) CAPM uses Beta as a measure of risk. Beta has two main weaknesses:
  1. It is a historical calculation instead of a forward looking estimate.
  2. 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.
However, beta provides a starting point. Even without the use of beta, investors would still have to assess a hurdle rate to evaluate investment prospects. The following table uses the CAPM to compute hurdle rates for these Communication Service stocks.
Hurdle Rates
Ticker Risk Free rate (a) Beta (b) Equity Risk Premium (c) Hurdle rate =(a) +(b) x (c)
PT 2.96% 0.8 6.0% 7.7%
CEL 2.96% 0.6 6.0% 6.7%
PTNR 2.96% 0.7 6.0% 7.2%
FTR 2.96% 0.8 6.0% 7.8%
WIN 2.96% 0.9 6.0% 8.5%
FTE 2.96% 0.8 6.0% 7.5%
CHT 2.96% 0.3 6.0% 4.9%
CTL 2.96% 0.8 6.0% 7.5%
TEF 2.96% 1.0 6.0% 8.8%
TSP 2.96% 0.6 6.0% 6.3%
TEO 2.96% 1.1 6.0% 9.4%
T 2.96% 0.7 6.0% 7.0%
BCE 2.96% 1.0 6.0% 8.7%
VZ 2.96% 0.7 6.0% 7.0%
TMX 2.96% 1.0 6.0% 8.9%
TI 2.96% 1.0 6.0% 8.9%
PHI 2.96% 0.6 6.0% 6.8%
NZT 2.96% 1.1 6.0% 9.6%
TU 2.96% 0.8 6.0% 7.9%
TLK 2.96% 1.1 6.0% 9.3%
TNE 2.96% 0.7 6.0% 7.0%
BT 2.96% 1.3 6.0% 10.8%
TSU 2.96% 1.0 6.0% 8.7%
Data provided by services downloaded on July 22, 2011.

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.
Estimated Forward Dividend Yield
Ticker Dividend Yield (a) Estimated Dividend Growth (b) Estimated Forward Dividend Yield =(a)x (1+(b))
PT 19.4% 15.0% 22.3%
CEL 10.4% 15.0% 11.9%
PTNR 10.2% 15.0% 11.7%
FTR 9.6% 0.0% 9.6%
WIN 7.9% 0.0% 7.9%
FTE 7.8% 6.9% 8.4%
CHT 7.6% 4.0% 7.9%
CTL 7.6% 15.0% 8.7%
TEF 6.8% 15.0% 7.8%
TSP 6.6% 15.0% 7.6%
TEO 6.0% 0.0% 6.0%
T 5.7% 5.5% 6.0%
BCE 5.2% 10.3% 5.7%
VZ 5.2% 4.7% 5.4%
TMX 5.1% 10.0% 5.6%
TI 4.7% 10.0% 5.2%
PHI 4.7% 15.0% 5.4%
NZT 4.4% 6.9% 4.7%
TU 4.0% 12.2% 4.5%
TLK 3.7% 6.8% 3.9%
TNE 3.3% 15.0% 3.8%
BT 3.2% 10.0% 3.6%
TSU 2.5% 10.0% 2.7%
Data provided by services downloaded on July 22, 2011.

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.
Estimated Price Appreciation
Ticker Hurdle rate (a) Forward Dividend Yield (b) Implied Price Appreciation =(a)-(b) % Dividend Yield =(b)/(a)
PT 7.7% 22.3% -14.6% 289%
CEL 6.7% 11.9% -5.3% 179%
PTNR 7.2% 11.7% -4.6% 164%
CHT 4.9% 7.9% -3.0% 161%
FTR 7.8% 9.6% -1.9% 124%
TSP 6.3% 7.6% -1.3% 120%
CTL 7.5% 8.7% -1.3% 117%
FTE 7.5% 8.4% -0.9% 112%
WIN 8.5% 7.9% 0.6% 93%
TEF 8.8% 7.8% 1.0% 88%
T 7.0% 6.0% 1.0% 86%
PHI 6.8% 5.4% 1.4% 79%
VZ 7.0% 5.4% 1.5% 78%
BCE 8.7% 5.7% 3.0% 66%
TEO 9.4% 6.0% 3.4% 64%
TMX 8.9% 5.6% 3.3% 63%
TI 8.9% 5.2% 3.7% 58%
TU 7.9% 4.5% 3.4% 57%
TNE 7.0% 3.8% 3.2% 54%
NZT 9.6% 4.7% 4.9% 49%
TLK 9.3% 3.9% 5.3% 43%
BT 10.8% 3.6% 7.2% 33%
TSU 8.7% 2.7% 6.0% 31%
Source: Author Calculations

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.

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