Should You Put Telecom Stocks on Hold?

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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 limits upside, which hampers your overall returns.

Do These Stocks Go the Distance?

The first stock we'll look at is Verizon (NYSE: VZ). The company is familiar to U.S. individuals and families through successful and effective mass-marketing. Verizon 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 also possesses a 4% dividend with room to grow.

However, Verizon'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'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 (NYSE: T). Despite recent customer frustration over dropped calls and slow throughput, AT&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'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. 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.

Lastly, we'll study Sprint Nextel (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'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. 

Dialing in On a Dime

So why is this significant? Telecom stocks should interest investors who seek passive income. These companies are advantageous in the current market due to their large regular and reliable payouts. The ability to earn dividend income going forward is critical to both maximize returns as well as hedge inflation. In the end, telecoms make sense in your portfolio if you seek stability while enjoying high yield and potential capital appreciation.

Making a Call on Telecoms

As stated earlier, the telecom industry is intensively competitive. As with any stock, predicting the future is difficult, if not impossible. In terms of telecoms, they behave much like bonds: a nice coupon with the potential uptick and little else. In general, I try to avoid the telecom sector, but if you wanted to invest there, you might go with AT&T. I think there's just more to like and a more compelling argument to be made for the stock. And although customers in general have been less satisfied with quality of service (QoS) issues, expect most of these to be resolved going forward as the company continues wireless network expansion.

In sum, despite AT&T's current competitive wireless disadvantage to Verizon anticipate this issue to be aggressively addressed by corporate management. Regarding Sprint Nextel's run, I think it's largely over. Although a turnaround is always possible, don't hold your breath. In the end, as sector improvement continues, new telecom investment opportunities will become more attractive. In the meantime, investors should do their due diligence and juxtapose telecom with more lucrative investments. 

David Mercer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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