Friday’s inflation data from China and India showed accelerating inflation in both economies. At the same time, real interest rates in a number of the world’s major economies still remain negative. Investors buying fixed-income securities such as government bonds risk earning negative real yields. But JPMorgan and Macquarie securities have found a telecom stock each that pays a 9 percent dividend.
JPMorgan’s regional telecom analyst James Sullivan’s top high-yielding pick is Advanced Info Services (AIS). The company is one of only 3 players in the mobile phone market in Thailand. The 9 percent yield is significantly higher than the 3.65 percent yield on the 10-year benchmark Thai government bond.
"We see scope for continued EPS upside as well as a valuation multiple re-rating, usually our best case scenario as it provides two ways to be "right", i.e. make money," says Sullivan.
In general, JPMorgan says Thai telcos are trading at significant spreads relative to Thai government bonds and there could be further upside for the stocks as the regulatory environment stabilizes. Thailand’s 3G auction has been repeatedly pushed back after a Thai court last year issued an injunction against the planned sale of 3G mobile licenses.
State-owned firms had filed petitions challenging the authority of the National Telecommunication Commission to allocate the 2.1-gigahertz frequency spectrum.
There’s one risk for AIS though. The company’s concession to operate 2G mobile services is due to end in 2015 and the government could redistribute spectrum via auction. But AIS does appear to have the cash to ensure it gets spectrum when the time comes.
Mark Matthews of Macquarie Securities recommends another telecom stock, PLDT of the Philippines. Like Thailand’s AIS, PLDT too pays a 9 percent dividend, much higher than the 6.6% benchmark 10-year government bond yield. The company has about 60 percent of the fixed line market and more than half the mobile market in the country. It also had a 100 percent dividend pay-out ratio (i.e. the percentage of earnings paid out as dividend) for the last 3 years and Matthews expects that to continue.
PLDT is currently in the process of buying the country's number 3 player Digitel. Matthews also expects upside from increasing mobile internet usage in the country.
Disclosures: Mark Matthews and Macquarie do not own PLDT shares and James Sullivan does not own shares of AIS.