Why Telecom Stocks Are An Attractive Buy
Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everywhere you go, people are glued to their cell phones. It has reached the proportions where often one sees a young couple walking down the beach hand in hand, while their other hands hold on to their cells, talking to other people! Jokes aside, 2013 will be an exciting year filled with opportunities for the telecom industry. Robust growth of wireless coupled with plump dividend yields add up to a solid fundamental case and low-risk. Dividend investors have been looking towards the telecom industry in search of companies with good growth prospects. Investors have been attracted by inelastic demand for wireless products, combined with dividend yields above 5%.
The mobile phone today is a central part of our lives, be it at home or at our workplaces. Consumers today are no more worried about the internet bills as long as they get their pennies worth. The massive rise in data consumption needs from consumers is a bright green signal for the telecom giants. With the advent of 4G the mobile browsing experience has never been better. Meanwhile, a steady stream of new devices and services capable of exploiting that bandwidth will come online, including many in vertical markets, especially banking, mobile payments, automotive telematics, and health care. In fact, it is estimated that in 2012 the U.S. mobile ecosystem generated economic activity of nearly $200 billion—the equivalent of one of the 50 largest economies in the world. U.S. 4G network investments over the five-year period could fall in the range of $25 billion to $53 billion. U.S. spending on wireless and wired network infrastructure will grow to $296 billion by 2015. The Middle East/Africa region will have 10% growth in telecom spending through 2015, followed by Asia Pacific at 9.5% and Latin America at 7.5%. In 2013 consumers will spend $108 billion on wireless data and $91.5 billion on wireless voice
With the global Internet traffic expected to quadruple by 2015, and in five years mobile broadband traffic will be 35 times current levels, now is the best time to get into the sector. The cloud and monetizing data are two big opportunities for telecom. With the changing business environment enabled by mobile and other technologies, the enterprise segment is ready for development.
Verizon Wireless (NYSE: VZ) is the largest telecom provider in the U.S., with backing from Vodafone, which is one of the largest wireless companies in the world. Verizon's dividend is also attractive, in part because it pays at an inverse relationship to the stock price (i.e. investors reap the benefit of an increasing dividend if the stock price starts to fall). Verizon continues to be a U.S. powerhouse with strong growth potential, smart acquisition activity, and increasing revenue.
This quarter the profit margin in the Verizon Wireless business, based on earnings before interest, taxes, depreciation and amortization, rose to 50% in the third-quarter from 49% in the previous quarter. More smartphone users watching videos or streaming music and enrollment in shared data plans meant bigger phone bills, and a 6.5% increase in the price for the average monthly contract account to $145.42. With earnings per share of $1.08, compared to AT&T's (NYSE: T) $0.76, Sprint's (NYSE: S) -$1.44, and others below that mark, and price-to-earnings ratio of 40.78, compared to AT&T's 45.15 and the industry average of 31.60, Verizon is a promising buy.
In the U.S., AT&T has continued to benefit from strong brand recognition, which has made it the second largest U.S. provider. AT&T is in the process of raising capital via bond issuance, and I can only hope that management will use the capital to invest in some sustainable growth prospects. AT&T is expected to enjoy 6.5% EPS growth over the next 5 years. AT&T is a low volatile stock with a fat dividend pay, which thus makes it a deserving candidate for growth investments.
With the enormous demand of data consumption and innovative products being launched, getting into the telecom sector will surely set your portfolio ringing!
The rewards which the stock market holds out to those who read it right are enormous; the penalties it extracts from careless, dozing, or “unlucky” investors are calamitous.
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