For many years, income investors have gravitated toward telecom stocks because of their generous dividend yields. Indeed, the average yield of stocks in the telecom space is normally well above the Value Line median.
To create our list, we ran a simple screen of stocks in the Telecom Utility, Telecom Services, and Telecom Equipment industries, and ranked them by dividend yield, from highest to lowest. Our only other criteria was that all issues trade above $5.00 a share.
Although these three industries sound very similar to one another, there are stark differences between them, and even between individual stocks in each group. Operators in the Telecom Utility Industry are generally regulated, and generate most of their revenue by providing customers with traditional fixed-line voice service. However, this legacy business is steadily shrinking, and many of these utilities are looking to expand their services to include wireless communications, high-speed Internet, and television. Stocks in this group typically offer the highest yields of the three industries under review, and many have substantial overseas operations.
The Telecom Services group includes several integrated telcos, which provide wireline, wireless, and other nontraditional services. Companies in this industry may have traditional wired operations, but most rely heavily (or solely) on wireless services for their revenues. Yields in this group are normally attractive, though not as high as those in the Telecom Utility space.
Companies in the Telecommunications Equipment Industry produce technologies and services that are used to facilitate people's communications. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, digital subscriber-line (DSL) and cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multinational corporations, telephone companies, governments, universities, institutions, commercial businesses and consumers. Stocks in this group normally have lower dividend yields than their Telecom Utility and Telecom Services brethren.
In this screen, we highlight three companies, Telefonos de Mexico, S.A.B. de C.V. (TMX), CenturyLink, Inc. (CTL), and Windstream Corp. (WIN), that rose to the top of our list. Subscribers can replicate and, perhaps more important, customize this screen using Value Line’s online stock screening tool.
CenturyLink, Inc. (CTL)
CenturyLink, Inc., along with its subsidiaries, is an integrated communications company. The services it offers include high-speed DSL, local and long distance voice, as well as broadband. It is the third largest telephone company in the United States. In addition, CenturyLink provides other services such as leasing, selling, and installing telecommunications equipment. The company has signed agency agreements with DIRECTV and Verizon Wireless that allow it to offer satellite television and wireless service to customers.
CenturyLink has been aggressive on the acquisition front lately. Its most recent purchase was an all-stock merger with Qwest Communications. The union expands CTL’s high-bandwidth services and captures a greater market share in the highly competitive wireless communications landscape. It is also eyeing other purchases with specific intentions to acquire Savvis, an Internet infrastructure outfit for approximately $2.5 billion. Consolidation here will give CenturyLink leverage in the high-growth area of cloud computing solutions, a market that is estimated to grow to about $240 billion by the end of the decade.
Income-oriented investors will likely find these shares attractive. The dividend yield is well above the Value Line median, at present. And recent consolidation efforts, mainly realized through the acquisition route, are anticipated to enable cost synergies. Further, a more streamlined business should enhance the company’s free cash flow, allowing ongoing dividend payouts to shareholders.
Telefonos de Mexico, S.A.B. de C.V. (TMX)
Telefonos de Mexico is the main telecommunications provider in Mexico. The company offers local and long distance services, as well as interconnection capabilities to mobile phone carriers. TMX offers services, such as Internet access and broadband to commercial and residential customers. In addition, the portfolio also consists of several corporate network services, such as network outsourcing and communications integration.
The wireless provider has been plagued by regulatory issues in the recent past. It was denied a television license and fined for not allowing Telefonica interconnection access in 2007 and 2008. Undoubtedly these scenarios have weighed heavily on the stock price. In addition, challenges may arise due to the competitive wireless landscape which has caused weak demand and a slower revenue growth rate than historically.
That said, the company has done a good job of generating a healthy cash flow balance. This allows it to support its financial obligations as well as to reward shareholders with a healthy dividend payment, which is still generous in the 3- to 5-year period.
Windstream Corp. (WIN)
Windstream Corp. is the largest domestic, rural wireline telecom company. Together with its subsidiaries, Windstream provides phone, high-speed Internet, and digital services mainly in rural regions of the United States. It also provides other telecommunications services such as interconnection, long distance, and custom calling services to both residential and business customers.
Since the company parted ways with ALLTEL Corp., its former parent, it is making progress transitioning from mainly wireline services, to more broadband and business data offerings. The revised portfolio caters to both residential and commercial customers alike, with a focus on cloud computing solutions for businesses, and digital-TV delivery on the consumer side. In addition, the company has been consistent in its strict expense management practices, thereby facilitating a healthy cash flow balance. In fact, its cash flow covers its capital outlays and is also able to maintain a good dividend payout to shareholders.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.