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Telecom Stocks Prove to Be Safe Harbor for Investors

Frank Byrt
Wednesday, 20 Jun 2012 | 11:34 AM ET

The telecommunications industry is the top-performing stock sector this year, thanks to its high dividend payouts and domestic focus.

A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.
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A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.

That serves to attract investors seeking shelter from the two biggest challenges they face right now — historically low yields from fixed income investments and the uncertainties stemming from Europe's continuing economic crisis and the volatility they've created in U.S. markets.

"We think the relative appeal of telecom stocks is the stable cash flow generation, minimal to zero exposure to European markets and above-average dividend yields," said S&P Capital IQ analysts in a recent research note.

Telecom stocks are paying an average 4.8-percent yield, which is attractive to most investors right now, given the low-rate environment and they range as high as Windstream's hefty 10.6 percent.

Indeed, the sector is the highest dividend yielding sector in the S&P 500 Index, which has helped propel the group to a 12.2 percent return this year, including 3 percent in the past week. The consumer-discretionary sector is in second place with a return of 11 percent. The S&P 500 is up 8 percent this year.

Many of the telecommunication sector's members appear to still have some upside as several firms are digesting recent acquisitions while the industry consolidates. They're also benefiting from the healthy, but slowing, growth in the number of wireless device subscribers and their increasing dependence on their services, which is boosting chargeable minutes.

Of the seven stocks summarized below, analysts' "buy" ratings range from a low of five to 10, which is a particularly strong showing for any one industry.

Integrated firms, those that offer a wide array of services, such as landline, mobile, wireless and cable, are expected to outperform, as they can make attractive package deals for consumers. That increases their "stickiness," the industry term for keeping a loyal customer base, which helps maintain a steady cash flow and dividends in this highly competitive industry.

But the forward price-to-earnings ratios of the firms in this sector are sky-high, a reflection of investors driving up prices for at least the past year as more and more investors have piled in. The background has been Europe's debt woes and the slowing economy in China, both of which are seen as threatening the growth of large international companies, which are traditionally big dividend payers.

Here are seven of the top telecommunications stocks arranged in inverse order of the number of "buy" ratings they have from analysts:

7. Windstream

Company profile: Windstream , with a market value of $6 billion, was formed through the July 2006 combination of former Alltel wireline assets and Valor Communications and continues to grow via acquisitions. It provides telephone service to more than 3 million lines and 1.3 million Internet access customers primarily in Southeast and southern Midwestern rural markets.

Dividend Yield: 10.56 percent

Investor takeaway: Its shares are down 15 percent this year but have a three-year, average annual return of 15 percent. Analysts give its shares five "buy" ratings, two "buy/holds," and 12 "holds," according to a survey of analysts by S&P.

S&P has it rated "strong buy" with a $13 price target, a 37-percent premium to its current price and says the company has cut costs through workforce reductions and "has closed on six different acquisition in the past three years, achieving significant cost synergies, and we are encouraged there are more opportunities." It has a forward P/E of 15.9.

6. Cogent Communications Group

Company profile: Cogent , with a market value of $894 million, provides high-speed Internet access, Internet Protocol, and communications services primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations.

Dividend Yield: None

Investor takeaway: Its shares are up 13 percent this year and have a three-year, average annual return of 32 percent. Analysts give its shares six "buy" ratings, two "buy/holds," two "holds," and two "weak holds," according to a survey of analysts by S&P. It's expected to earn 10 cents per share this year and 47 cents per share next year. Its forward P/E is a huge 35.5.

5. Frontier Communications

Company profile: Frontier , with a market value of $4 billion, more than doubled its size by acquiring wire-line assets from Verizon Communications in 2010. It now provides landline communications services, including voice services, to 5 million customers in rural areas and small and medium-sized cities.

Dividend Yield: 10.18 percent

Investor takeaway: Its shares are down 21 percent this year and have a three-year, average annual loss of 3 percent. Nevertheless, analysts give its shares six "buy" ratings, three "buy/holds," and 12 "holds," according to a survey of analysts by S&P.

S&P has it rated "buy," saying the company should see greater merger savings than previously announced and although there are as risks tied to its integration efforts and increasing competitive pressures, "we think the stock trades at too much of a discount to its peers and is undervalued," especially given its dividend yield. Its forward P/E is 17.1.

4. AT&T

Company profile: AT&T , with a market value of $208 billion, is the second-largest U.S. wireless carrier, serving 89 million traditional customers and is also the dominant local phone company in 22 states, serving about 40 million phone lines, 16 million Internet users, and 4 million television customers.

Dividend Yield: 4.93 percent

Investor takeaway: Its shares are up 21 percent this year and have a three-year, average annual return of 19 percent. Analysts give its shares seven "buy" ratings, seven "buy/holds," 20 "holds," and one "sell," according to a survey of analysts by S&P.

Analysts estimate it will earn $2.39 this year and that that will grow 7 percent to $2.56 next year. S&P has it rated "buy" with only modest price upside but said "we believe (its) strong balance sheet, expected wide operating margins in 2012, and its planned separation of non-core assets are positives." It has a forward P/E of 13.3.

3. TW Telecom

Company profile: TW , with a market value of $3.8 billion, provides voice and managed network services, specializing in Ethernet and transport data networking and Internet access, in the U.S. It has a forward P/E of 31. The company was formerly known as Time Warner Telecom.

Dividend Yield: None

Investor takeaway: Its shares are up 30 percent this year and have a three-year, average annual return of 32 percent. Analysts give its shares eight "buy" ratings, two "buy/holds," and seven "holds," according to a survey of analysts by S&P.

S&P has it rated "hold" and says that, "while we believe (it) has strong fundamentals and greater growth prospects than many telecom peers, we believe this is reflected" in its current share price.

Analysts' consensus estimate is that it will earn 59 cents per share this year, growing to 77 cents per share next year.

2. Verizon Communications

Company profile: Verizon , with a market value of $124 billion, is the largest U.S. wireless carrier with 95 percent coverage of the U.S. population due its 55 percent stake in Verizon Wireless, in a partnership with Vodafone. That unit now serves about 98 million U.S. customers. Verizon also serves about 25 percent of the U.S. population, primarily in the Northeast, via its landline network.

Dividend Yield: 4.57 percent

Investor takeaway: Its shares are up 11.5 percent this year and have a three-year, average annual return of 21 percent. Analysts give its shares 10 "buy" ratings, four "buy/holds," 21 "holds," and two "weak holds," according to a survey of analysts by S&P.

S&P has it rated "hold," based on valuation concerns but they say its "fundamentals appear sound to us. With its strong operating margin and perception of network quality, the company's wireless segment should be a driver for in 2012."

Analysts expect it to earn $2.50 per share this year and $2.80 in 2013. It has a forward P/E of 14.4.

1. CenturyLink

Company profile: CenturyLink , with a market value of $24 billion, provides local and long-distance, network access, private line, public access, broadband, data, managed hosting, colocation, wireless, and video services to consumers and businesses throughout the U.S. The company has been growing through acquisitions, including the April 2011 acquisition of wireline carrier Qwest Communications for $22 billion. CenturyLink is now the third-largest phone company in the U.S., providing local phone service to 15 million lines and high-speed Internet access to 5.5 million customers across 37 states.

Dividend Yield: 7.5 percent

Investor takeaway: Its shares are up 7.8 percent this year and have a three-year, average annual return of 14 percent. Analysts give its shares 11 "buy" ratings, four "buy/holds," and eight "holds," according to a survey of analysts by S&P.

Analysts' consensus estimate is for earnings of $2.49 per share this year, but they see a decline of 2 percent to $2.44 per share next year. It has a forward P/E of 17.

—By TheStreet.com's Frank Byrt

Additional News: Mergers of European Mobile Carriers Expected to Grow

Additional Views: Dialing Into Telecom Winners

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks.

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