How should you “call” telecom stocks? Should investors answer or hang up? Clearly, each company has advantages and disadvantages. By analyzing them you’ll be become cognizant of the risks / rewards of telecom investing. In particular, the sector is interesting to income investors seeking tax-advantaged alternatives to bonds. However, the challenge with utilities is they’re highly regulated and thus their profits capped. This constraint makes limits upside, which hampers your overall returns.
Do These Stocks Go the Distance?
The first stock we’ll look at is Verizon Communications Inc. (NYSE:VZ). The company is familiar to U.S. individuals and families through successful and effective mass-marketing. Verizon Communications Inc. (NYSE:VZ) also boasts arguably the most robust wireless network in the U.S., with continuous growth. Also, customer satisfaction tends to be higher than its peers, so customer retention is generally good. Verizon Communications Inc. (NYSE:VZ) also possesses a 4% dividend with room to grow.
However, Verizon Communications Inc. (NYSE:VZ)’s earnings are lackluster because of its need to expand wireless network capacity in order to compete. Furthermore, the company’s mature landline business is shedding customers as they “cut the cord,” opting for wireless-only plans. To Verizon Communications Inc. (NYSE:VZ)’s credit, it realized this trend early and built the decline into its business model, thereby stemming future profit-bleeding. Yet given its moving parts, you might want to wait until the stock is trading at a discount to capture higher yield and greater upside.
Next, we’ll examine AT&T Inc. (NYSE:T). Despite recent customer frustration over dropped calls and slow throughput, AT&T Inc. (NYSE:T) is actually decent compared to foreign competitors. Although this analysis may not be overly compelling, investors should remain positive about the stock. Among aspects to applaud is AT&T Inc. (NYSE:T)’s 5% dividend, which is considerably more attractive than Verizon’s.
And although the stock is expensive with a P/E of 27.5, it’s a bargain compared to Verizon Communications Inc. (NYSE:VZ). However, investors should anticipate decreased sector earnings going forward, because of cell tower and fiber-optic infrastructure spending. Unfortunately, this is the premium (all) utility investors pay. Therefore, the time may not be right to stake a long-term position in AT&T Inc. (NYSE:T).
Lastly, we’ll study Sprint Nextel Corporation (NYSE:S). As you might suspect; the company had a plethora of problems since merging with Nextel, and has hemorrhaged ever cash ever since. Likewise, perpetual telecom mergers are the exact phenomena that make telecom investment so perilous to begin with; therefore, I generally recommend going long with the sector leader.
Sprint Nextel Corporation (NYSE:S)’s customer retention story is a train wreck. And although the company offers attractive wireless packages such as unlimited talk, text, and web, these incentives are not enough to lure new customers as well as keep old ones. Therefore, you may want to avoid the stock and pick one of the former.