Join        Login             Stock Quote

Telecom Stocks : The "Ka-Ching" Ring Tone

 May 10, 2012 11:04 AM

(By Kevin Donovan) In a skittish U.S. stock market scared that the deepening shadows of Europe will lengthen to darken these shores, investors in two big telecommunications names have been enjoying extended sunshine.

We think it's still midday for Verizon Communications (VZ) and AT&T (T) and that it's not too late to buy, whether you believe the bull market is in its dotage or not.

Trading near 52-week highs, the U.S. phone service giants have delivered healthy stock price appreciation this year along with hefty dividends.  Verizon's share price is up 6.9% and AT&T's up 10.1% in the last three months.  On a 12-months' basis, the shares are up 8.9% and 5.4%, respectively.  That compares with industry share price returns of 2.3% and -1.0% for the same time periods.

[Related -T-Mobile US Inc (NYSE:TMUS): AT&T Inc.(NYSE:T) Could Suffer In Wireless War]

Verizon sports a dividend yield of about 4.93%, while AT&T's dividend is at 5.33%.

Coverage is impressive, too.  In the latest quarter, Verizon reported free cash flow of $2.4 billion, covering the $0.50 quarterly dividend about 1.7 times.  Meanwhile, AT&T reported first quarter free cash flow of $3.5 billion, which covered the $0.44 dividend 1.33 times.

Compared with the industry and the market, these big boy companies trade at premiums we think are justified, given clear growth prospects and histories of steady dividend increases. On estimated 12-months earnings, Verizon is valued at 43.1 times earnings and AT&T at 47.6 times, versus an industry average of 28.0 and the S&P 500 at 15.93.

[Related -Apple Inc. (NASDAQ:AAPL): China Mobile On Board, But Challenges Remain]

On a forward basis, the multiples are more reasonable, with Verizon at 14.48 times 2012 estimates and AT&T at 12.77.  The S&P 500 PE for forward estimates is 13.25.

Growth in earnings and free cash flow is key to sustaining returns, so we looked at recent results and prospects for these two companies and are confident they can deliver.

At Verizon, first quarter EPS were $0.59, up 15.7% over first quarter last year. Revenue was up 4.6% year over year to $28.2 billion. Adoption of Verizon's high-speed optic cable service, FiOS, continued with room for further gains. And smart phone penetration remained brisk.  Verizon said its broadband net additions were the highest in three years.

AT&T reported $0.60 diluted EPS compared to $0.57 in the first quarter of 2011.  Revenues of $31.8 billion were up1.8% vs a year earlier.

The companies had similar operating margins in the latest quarter – Verizon at 17.5% and AT&T at 18.0% vs the industry's 15.9%. Risks include smart phone subsidies eating into margins and cutbacks to data growth if consumers are pinched by another economic downturn.  We don't see that, despite the risk of European contagion and recent anemic jobs data.  We think equities that pay safe dividends significantly higher than returns on Treasury notes will continue to be valued by investors.  Verizon and AT&T, the dominant carriers in the telecommunications sector, fit that bill.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageHas Warren Buffett Found The Best Investment In Oil?

Shares of oil stocks plunged again as the price of West Texas Intermediate wiped out nearly half of its read on...

article imageDemand For Safe-Haven Bonds Surged Last Week

The crowd piled into investment-grade bonds last week as economic worries triggered an exodus out of risky read on...

article imageThoughts on MetLife and AIG

In some ways, this is a boring time in insurance investing.  A lot of companies seem cheap on a book and/or read on...

article imageA 2016 Recession Would Be Different

If the US or the Eurozone entered a recession this year, a few macroeconomic variables would look very read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.