{"id":28511,"date":"2012-03-23T09:26:46","date_gmt":"2012-03-23T13:26:46","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/23\/choosing-the-right-telecom-dividend-stock\/"},"modified":"2012-03-23T09:26:46","modified_gmt":"2012-03-23T13:26:46","slug":"choosing-the-right-telecom-dividend-stock","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/23\/choosing-the-right-telecom-dividend-stock\/","title":{"rendered":"Choosing the Right Telecom Dividend Stock"},"content":{"rendered":"

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

\u201cIt\u2019s hip to be square.\u201d<\/p>\n

–Huey Lewis and the News<\/p>\n

It\u2019s a funny world we live in.\u00a0 Investments that would have been considered the domain of widows and orphans a decade ago are now downright trendy.<\/p>\n

I\u2019m talking, of course, about dividend-paying stocks.\u00a0 During the raging bull markets of the 1980s and 1990s and the housing boom of the 2000s, investors gave very little thought to the income being thrown off by their investments.\u00a0 When you could flip a tech stock\u2014or a house\u2014in a couple of months and walk away with a 50% gain, earning a couple extra dollars from dividends seemed a little petty.<\/p>\n

Two bear markets and a housing collapse later, investors have come to appreciate the certainty of getting a regular dividend check rather than waiting\u2014and hoping\u2014for the market price to rise.\u00a0 \u00a0In a volatile, uncertain world, dividends may be the only return you get.\u00a0 This was certainly the case for investors who held S&P 500 index funds last year.\u00a0 Not including the 2% dividend, their return would have been exactly zero.<\/p>\n

Today, some of the highest yields available are in the telecom sector.\u00a0 In prior articles, I\u2019ve written at length about Spanish telecom giant Telef\u00f3nica (NYSE: $<\/span>TEF<\/a>),<\/strong> which is still one of my favorite stocks to hold for the rest of this decade (see \u201cDon\u2019t Sing the Income Investing Blues<\/a>\u201d).\u00a0 In this article, I\u2019m going to take a look at one of Telef\u00f3nica\u2019s European rivals, British-based Vodafone (NYSE: $<\/span>VOD<\/a>),<\/strong> and its American partner, Verizon Communications (NYSE: $<\/span>VZ<\/a>).<\/strong>\u00a0 The two companies jointly own Verizon Wireless, the largest mobile phone operator in the United States.\u00a0 (Verizon holds 55% of Verizon Wireless, and Vodafone the remaining 45%.)<\/p>\n

I\u2019ll start first with Verizon because the investment case is more straightforward.\u00a0 You buy Verizon for the dividend stream; end of story.<\/p>\n

Verizon currently pays out $2.00 per share in dividends, which works out to a yield of 5%.\u00a0 That\u2019s a great yield in a world where the 10-year Treasury barely yields 2%.\u00a0 Importantly, Verizon also has a long history of raising its dividend.\u00a0 That $2.00 dividend investors enjoy today was just $1.50 ten years ago.<\/p>\n

Investors should not, however, expect much in the way of capital gains.\u00a0 With the exception of the smart phone and tablet data plans sold by Verizon Wireless, all of the company\u2019s businesses are mature and in more or less saturated markets.\u00a0 The home landline business is in terminal decline, and home internet and video services are no longer a growth industry.\u00a0 Growth in business telephony is dependent on growth in business employment, which has been a little less than stellar these days.<\/p>\n

Furthermore, Verizon is an American company with very little exposure to faster-growing emerging markets.<\/p>\n

Verizon is also far from cheap.\u00a0 It trades at 14 times estimated 2013 earnings.<\/p>\n

For all of these reasons, Verizon investors should look at their stock the same way they would look at a corporate bond\u2014as a source of current income and nothing more.<\/p>\n

Vodafone is a more intriguing investment opportunity.\u00a0 Though it yields slightly less in dividends than Verizon (3.6% vs. 5.0%), Vodafone is priced at only 10.3 times forward earnings.<\/p>\n

Vodafone also happens to benefit from the areas of Verizon\u2019s business that still have growth potential\u2014those operated by Verizon Wireless.\u00a0 Verizon recently authorized Verizon Wireless to pay a dividend to Vodafone for the first time since 2005.\u00a0 The one-time dividend amounts to $4.3 billion\u2014which is not particularly large for a company of Vodafone\u2019s size (Vodafone had $74 billion in sales last year).\u00a0 Still, $4.3 billion is nothing to sneeze at.<\/p>\n

Vodafone suffers from the same problem Verizon does in its home market\u2014the United Kingdom and Europe are mature markets, and outside of smart phone data plans, opportunities for growth are slim.\u00a0 But unlike Verizon, Vodafone has incredible growth opportunities outside<\/em> its home markets.<\/p>\n

My biggest reason for liking Vodafone is its exposure to emerging markets, a characteristic it shares with rival Telef\u00f3nica.\u00a0 Vodafone has 134 million customers in India alone, and over 75 million in Africa.<\/p>\n

Mobile phones are clearly no longer a novelty anywhere in the world, but market penetration in most emerging markets is less than half that of Europe.\u00a0 And even within their existing customer base there is enormous potential.\u00a0 Prepaid customers can be converted to more profitable post-paid subscribers, and both can be upsold to higher-minute plans and data plans.\u00a0 There are years (if not decades) of high growth rates to be enjoyed in Vodafone\u2019s primary emerging markets.<\/p>\n

How can I be so sure?\u00a0 Let\u2019s take a look at the numbers.\u00a0 62% of Vodafone\u2019s customers are in emerging markets, yet they only account for 27% of the company\u2019s revenues.\u00a0 This gap may never fully close, but you can rest assured it will get a lot closer as emerging markets continue to grow and thrive.<\/p>\n

Vodafone is also a proud member of the International Dividend Achievers club, meaning that the company has a long history of raising its annual dividend, and a holding of the PowerShares ETF that follows the International Dividend Achievers strategy (NYSE: $<\/span>PID<\/a><\/strong>).<\/p>\n

Bottom line: For a high yield today, buy Verizon.\u00a0 For a longer-term growth story that also pays a respectable and growing dividend, choose Vodafone.<\/p>\n

Disclosures: TEF and PID are held by Sizemore Capital clients.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter \u201cIt\u2019s hip to be square.\u201d –Huey Lewis and the News It\u2019s a funny world we live in.\u00a0 Investments that would have been considered the domain of widows and orphans a decade ago are now downright trendy. I\u2019m talking, of course, about dividend-paying stocks.\u00a0 During the raging bull markets of the 1980s … <\/p>\n

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