As I’ve said many times before, investors can find plenty of rich yields in telecom stocks. Predictable subscriber demand gives these companies plenty of cash flow to support high dividends. In addition, telecom companies currently benefit from the rollout of the 4G technology, which is exponentially expanding data usage.
In an earlier article, I listed the highest-yielding stocks by industry and a few telecoms I considered suitable candidates for further research. But it’s important to take a closer look at these stocks, simply because a high yield doesn’t necessarily mean high quality. Buying a stock based on its yield alone is extremely risky. Just as you would never buy a car without looking under the hood, you should never buy a stock without evaluating all of its fundamentals. My closer look at the highest-yielding telecom stocks revealed several potential values and a few high-risk dividend traps.
Here they are…
1. Portugal Telecom
Portugal Telecom, SGPS (NYSE:PT), the largest telecom operator in Portugal has been hurt by mandated rate reductions and southern Europe’s deepening financial crisis. The company recently posted third-quarter profits 29% lower than last year at $83 million, and analysts look for just 3% growth for each of the next five years.
Cash-flow coverage of the dividend was decent at 130%, but Portugal Telecom has a massive debt load totaling $14.6 billion, or six times cash flow. To be able to cut debt faster, the company halved its dividend last June to an annual rate of just 43 cents, which implies a forward yield of about 8.5%.
2. France Telecom
The largest French telecom has lost 30% of its market value this year because of Europe’s economic woes and a price war with a new mobile provider. The company’s cash flow dipped 7% in the third quarter to $4.8 billion, and France Telecom SA (NYSE:FTE) is guiding for a further drop in cash flow totaling just $9 billion in 2013.
The good news is even with reduced cash flow, the company will still have plenty to cover the $5.6 billion annual dividend.
3. NTELOS Holding Corp.
NTELOS Holdings Corp. (NASDAQ:NTLS) provides high-speed voice and data services to subscribers in the eastern and southeastern United States. Roughly 40% of the company’s revenue comes from a wholesale wireless service supplier agreement with Sprint. A major worry for investors is that Sprint won’t renew this contract when it expires in 2015.
NTELOS’ earnings per share (EPS) from continuing operations dropped 30% in this year’s third quarter to 22 cents. Analysts anticipate no better than 3% annual EPS growth in the next five years. While trailing 12-month cash flow of $100 million easily covers the $49 million dividend, NTELOS is weighted down by $451 million of debt. Last year, this company reduced its annual dividend by 25% to $1.68 a share.
4. City Telecom
City Telecom (H.K.) Limited (NASDAQ:CTEL) has solid 12-month EPS of $12.18 and more cash than debt. Clouding this otherwise rosy picture is the company’s recent sale of its telecom operations in order to become a pure play in TV content.
Launching an entirely new business positions City Telecom as a start-up, so the company plans to eliminate its dividend altogether for three years so it can invest in its TV operations.