{"id":39099,"date":"2013-06-18T12:38:29","date_gmt":"2013-06-18T16:38:29","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39099"},"modified":"2013-06-18T12:38:29","modified_gmt":"2013-06-18T16:38:29","slug":"telecoms-great-dividends-but-their-desperation-is-showing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/18\/telecoms-great-dividends-but-their-desperation-is-showing\/","title":{"rendered":"Telecoms: Great Dividends, But Their Desperation Is Showing"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Rumors flew over the weekend that AT&T ($<\/span>T<\/a>)<\/b> had made an offer to buy Spain\u2019s Telefonica ($<\/span>TEF<\/a>)<\/b> for $93 billion\u2014a roughly 50% premium to today\u2019s market cap.<\/p>\n

Telefonica was quick to dispel the rumor, and AT&T had no comment as Monday afternoon.<\/p>\n

My gut reaction is that this rumor is exactly that: a rumor.\u00a0 The sheer size of the deal makes it unlikely that it would ever make it past the assorted national telecom regulators without provoking anti-trust hysteria.\u00a0 AT&T is the largest telecom firm in North America, and Telefonica is a dominant player in Europe and Latin America.<\/p>\n

But while I don\u2019t see a deal happening, the prospect does raise a few questions.\u00a0\u00a0 Given that mobile phones are ubiquitous in the United States, smartphones are not far from the saturation point, fixed-line telecom is in terminal decline and broadband internet and paid TV are well past the saturation point, where does a behemoth like AT&T go for growth?<\/p>\n

One obvious answer is emerging markets, which is why Telefonica was allegedly on AT&T radar screen.\u00a0 Telefonica gets roughly half its revenues from Latin America, where fast internet and smartphone subscriptions are both still growth businesses.<\/p>\n

The problem is that there aren\u2019t a lot of assets there left to buy.\u00a0 The Latin American market is essentially a two-horse race between Telefonica and America Movil ($<\/span>AMX<\/a>)<\/b>, the company controlled by Mexican billionaire Carlos Slim.<\/p>\n

AT&T actually already owns 9% of America Movil,<\/a> making it the company\u2019s second \u2013largest shareholder.\u00a0 This would also make it complicated for AT&T to make a serious offer for America Movil\u2019s bitterest rival.<\/p>\n

There aren\u2019t a lot of easy targets elsewhere either.\u00a0 The European telecom giants tend to dominate in their countries\u2019 former colonial holdings, with Telefonica being a prime example.\u00a0 France Telecom ($<\/span>FTE<\/a>) <\/b>is active in 21 Middle Eastern and African countries, and Britain\u2019s Vodafone ($<\/span>VOD<\/a>)<\/b> has most of the rest of the world covered.\u00a0\u00a0 Vodafone operates in 30 countries, many of which are attractive emerging markets, and has partnerships in place with local providers in over 50 more.<\/p>\n

So, an American newcomer like AT&T would be competing on price against some entrenched competition for a capital-intensive business that doesn\u2019t have particularly great margins.\u00a0 Perhaps an aggressive emerging markets growth strategy is not so attractive after all\u2026<\/p>\n

I raised a few eyebrows earlier this year when I suggested that my favorite \u201ctobacco stock\u201d was semiconductor giant Intel (<\/span>INTC<\/a>)<\/span><\/b><\/a>.<\/p>\n

By \u201ctobacco stock\u201d I was referring to companies in slow-growth industries that had high barriers to entry.\u00a0 Because their growth prospects are limited, they tend to use their excess cash flows to buy back their own shares and pay out monster dividends.<\/p>\n

\"\"<\/a><\/p>\n

This is where AT&T, Verizon ($<\/span>VZ<\/a>) <\/b>and Sprint ($<\/span>S<\/a>)<\/b> are today.\u00a0 Barriers to entry are not as high in mobile telecom as they are in, say, tobacco or semiconductors.\u00a0 Consider the recent success of discount providers like Metro PCS ($<\/span>PCS<\/a>)<\/b>, which recently merged with T Mobile.\u00a0 But given the limited spectrum available and the cost of building out a network, the current providers have little to worry about in the way of new entrants.<\/p>\n

Sprint is a train wreck right now, which is thankfully being bought out by the Japanese telco Softbank ($<\/span>SFTBY<\/a>)\u2014<\/b>a company so desperate for growth in its moribund Japanese home market that even a dog like Sprint looks attractive).<\/p>\n

But how do AT&T and Verizon look?<\/p>\n

AT&T yields 5% in dividend and is aggressively buying back its shares.\u00a0 Verizon yields 4% and has not made any recent announcements regarding share repurchases.<\/p>\n

5% and 4%, respectively, are not bad yields in this environment.\u00a0 This puts the two major telecom companies about on par with triple-net REITs and MLPs.<\/p>\n

But if I have to choose between telecom stocks and REITs and MLPs, I\u2019m taking the REITs and MLPs.\u00a0 Both should benefit from an improvement in the economy, as a healthier economy means rising rents and increased energy usage.\u00a0 Both are also better positioned to weather any uptick in inflation.<\/p>\n

AT&T and Verizon might also benefit from an improving economy, as more employment means more business phone and data lines and, to some extent, upselling to more expensive personal plans.\u00a0 But both operated in an inherently cutthroat and deflationary business.\u00a0 Quality real estate appreciates in value over time.\u00a0 Telecommunication equipment does not.<\/p>\n

Bottom line: in a diversified income portfolio, there might be room for the likes of AT&T or Verizon.\u00a0 But I would give a higher allocation to quality REITs and MLPs.<\/p>\n

Sizemore Capital is long TEF. This article first appeared on InvestorPlace<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/a><\/strong>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

 <\/p>\n

 <\/p>\n

\n

Related posts:<\/p>\n