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Telefonica S.A. (ADR) (TEF), AT&T Inc. (T), China Mobile Ltd. (ADR) (CHL): Which Telecom Is Right for You?

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Growth, income and stability are the three things that make up the holy trinity of investing. Companies that possess all of these qualities are rare, and typically produce something that is a backbone of society. The telecommunications sector seems to hit on all three. Telecom giants in the US and abroad typically have the power to raise rates (growth), have large dividends (income), and are necessary in their customers lives (stability).

Ole!

Telefonica S.A. (ADR) (NYSE:TEF)Telefonica S.A. (ADR) (NYSE:TEF) is the Spanish telecom giant that is in the midst of acquiring Germany’s KPN for $10.7 billion. The company is betting big on Europe’s recovery, and the reduced competition in Germany will help it maintain its margins.

Telefonica S.A. (ADR) (NYSE:TEF) Deutschland’s new company setup is looking for approximately 5 billion to 5.5 billion euros in savings from the new joint venture. Old shareholders will see Telefonica maintaining a 65% ownership of the new venture. The combined company will be the second largest telecom in Europe. This will also geographically diversify the company and allow it to improve its earnings per share and free cash flow.

Telefonica S.A. (ADR) (NYSE:TEF) is also looking to its large presence in Brazil and Latin America as an engine for growth in the future. These economies have shown over 11% revenue growth year-over-year. The company saw overall free cash flow generation increase by 16.5% on a year-over-year basis, even with currency fluctuation headwinds.

During 2012, Telefonica S.A. (ADR) (NYSE:TEF) faced an extremely challenging economic and financial environment, and the board of directors decided to cancel the dividend in response. Starting in November, however, Telefonica will again pay a 0.35 euro ($0.47) dividend bi-annually; this gives the shares a yield of 6.5% at today’s prices. Telefonica was able to reduce net debt by over 10 billion euros ($13 billion) while the dividend was suspended, giving itself more financial flexibility for mergers and acquisitions.

Going forward, Telefonica S.A. (ADR) (NYSE:TEF) will be focusing on it’s global network and containing costs. The larger it can grow its network while reducing the number of its help centers and cutting redundant overhead, the better the company will perform.

Home is where the heart is

AT&T Inc. (NYSE:Tis the largest telecom company in the US with a market cap approaching $200 billion. This telecom giant has a gross margin of 56% and a net profit margin of 6%.

AT&T Inc. (NYSE:T) has been diversifying its revenue streams in the US and saw it’s U-verse revenue grow by 30% year-over-year. This service allows AT&T to become a one-stop-shop for land line, mobile, Internet and television for its customers. AT&T Inc. (NYSE:T) does have nearly 17% of it’s revenue coming from wireline, and has seen revenues from this segment stabilize as customers previously were “cutting the cord” with their landlines.

AT&T Inc. (NYSE:T) has been making good use of it’s free cash by repurchasing shares. Ma Bell repurchased 4% of the shares outstanding, helping to increase earnings per share by 7.6% this quarter to $0.71. AT&T also had lower interest expenses during the most recent quarter as it took advantage of favorable interest rates this year.

AT&T Inc. (NYSE:T) will continue to give its shareholders a 5% dividend and good upside growth potential as the company’s strong free cash flow position continues to reduce the number of shares outstanding. AT&T is also able to cover it’s network upgrades and maintenance and fund its pension obligations with operating cash flow. Now is a good time to be an investor in AT&T.

Size matters

China Mobile Ltd. (ADR) (NYSE:CHL) is the world’s largest telecom company, and it keeps growing. Last month China Mobile added nearly 4.9 million customers, making the total added customers this year total 29.8 million. China Mobile Ltd. (ADR) (NYSE:CHL) also has the benefit of having a low percentage of customers using smartphones, as only 20% use 3G today.

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