Dividend Investors: Don't Overlook These 5 Telecom Stocks

Includes: CTL, ERIC, NOK, T, WIN
by: ValueMax

I like the telecom industry for its ability to produce stable earnings and ample dividend payments. In this article, I analyze five of my best telecom dividend ideas. I picked these five stocks because of their strong market positions, earnings outlooks, and current payout ratios. I will also explain why these companies should not be overlooked by income investors in 2012.

AT&T (T), the telecom giant, took a big balance sheet loss in the fourth quarter of 2011. However, the company's nearly $7 billion net loss during that time was due in large part to the break-up charge of over $4 billion that had been levied against the firm for the failed merger with T-Mobile.

Yet, even with that seemingly backwards step, AT&T posted a 70% growth in postpaid net subscriber income during that same quarter thanks to a boost in holiday smart phone sales. This added over $32 billion in revenue - a gain of 4% over the same quarter of last year.

With an earnings per share estimate of over $2 per share versus 66 cents for fiscal year 2011, I agree with analysts' predictions that AT&T is poised for earnings growth of 270% plus a dividend yield of nearly 6%. Because of its strong performance and its strong dividend, I feel that AT&T is a good pick for both equity investors as well as those buyers who are seeking long term income.

Given its payout ratio of nearly 6%, I also think the company has an ample cash cushion up to its dividend by 5% this year. The attempted acquisition of T-Mobile USA was a good move on AT&T's part, even though it did not pan out. Management thinks big, which I think will translate into adoption of better technologies ahead of rivals, going forward. I would be a buyer of AT&T shares at $30 apiece.

Ericsson Telephone Company (ERIC) is the leading worldwide provider of technology and services to telecom operators as well as the leader in 2G, 3G, and 4G mobile technologies. The company currently provides network support for over 900 million subscribers across the globe.

Although the stock price hit a 52-week low of just over $9 within the past year, its fundamentals are still strong and analysts remain fairly bullish because of its position to capitalize on the still growing demand for broadband capacity.

I tend to agree in that the stock could be a great value play for investors who are seeking income. Given its five year average price to earnings ratio of 1.3% and nearly $7 billion in cash, in my opinion, income investors could find themselves with limited downside risk along with the added possibility for a small amount of upside potential. In addition, even though the stock price was off for 2011 by roughly 11%, Ericsson still maintains a strong dividend yield of 3.6%. If the payout ratio stands at 0.09%, I would be a buyer below $10 per share.

Windstream Communications, Inc. (WIN), the telecom and cable services company, saw approximately $4 billion in annual revenues for last fiscal year. It has continued its core operations of providing IP voice and data services as well as offering managed hosting and other communication systems to government agencies and businesses.

This mid-cap company with a market capitalization in excess of $6 billion has a long history of paying a large dividends to its investors, often at a yield of 8% or higher. While Windstream acquired eight smaller telecom companies between 2007 and 2011, it was still able to generate roughly $225 million in free cash flow - the money available to pay dividends - per quarter in 2011. This equates to approximately 45 cents per share that should easily be able to pay out the company's 25 cent quarterly dividend.

Due to its larger merger with Paetec that is set to be complete early this year, I expect that revenues could be increased by as much as 50%, keeping the 25 cent quarterly dividend safe for the near future - especially in light of the fact that a large part of the merger with Paetec included a management commitment to maintain this dividend payout of 25 cents per quarter. I applaud the purchase of Paetec because it will allow Windstream to continue increasing revenue in related industry sectors.

CenturyLink (CTL), the third largest company in the telecom sector behind Verizon and AT&T, holds a market cap of roughly $23 billion. Although all three top telecom company stocks offer large dividend yields, CenturyLink stands above the rest at just under 8%. While some investors may feel this is too good to be true, I believe that it's not only achievable but highly possible that the company's dividend yield will continue to grow.

One reason for this is that since making several large acquisitions in 2008, CenturyLink's revenue has increased dramatically from approximately $2.2 billion in 2008, to a projected $19 billion for fiscal year 2011. I think that the additions of Quest Communications for just under $11 billion, Embarq Corporation for $11.6 billion, and Savvis for $2.5 billion were a wise move, helping to turn CenturyLink into one of the biggest fiber optic cable providers in the world.

Along with a rise in revenue has also come a steadily increasing dividend from 6.75 cents per quarter to 70 cents in 2008 alone. Today it stands at just under 73 cents, although I expect that with no future acquisitions in the works, the dividend is likely to be increased even further.

Nokia Corporation (NOK) is considered the world's number one mobile device manufacturer based on its market share. The company specializes in providing a variety of different mobile devices and offers internet services that include maps, music, media, games, and messaging.

Over the past year, Nokia's stock price has bounced between just under $5 to nearly $12 per share, although it has currently settled in the $6 range. I believe that this makes Nokia a great value, based on its dividend yield of roughly 7.5% and dividend payout ratio of over 100%. Investors should note that Nokia's dividend is paid annually. I also expect that the company will be able to continue to pay high dividends to its investors over the long term since I do think it has enough capital to support current R&D needs.

I'm excited about the prospects for Nokia's latest Lumia 900 handheld device, which has impressive camera and other features that could capture smart phone users' attention. Most investors do not appreciate that Nokia does not need to be number one in market share. Instead, the company should and is focusing on profitability, which should aid it in its effort to continue paying a hefty dividend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.