Which Telecom Business Should You Invest In?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the top executives of corporations often possess much more knowledge about the industry and the companies they are running, I often pay close attention to insider transactions. However, insiders might buy or sell stocks for a lot of reasons, including personal expenses or even just to create noise in the market. Thus, investors should look at the business fundamentals, along with the insider transactions to determine the attractiveness of a particular stock.

At the end of July, Director Michael McCallister of AT&T (NYSE: T) spent nearly $320,000 to purchase 9,000 shares of the company. Should we follow AT&T insiders into the company? Let’s take a closer look.

Second quarter growing performance and juicy yield

AT&T has reported a growing operating performance in the second quarter 2013. Its revenue came in at $32.1 billion, 2.6% higher than the revenue of $31.3 billion, excluding Ad Solutions’ revenue, in the second quarter last year. Both the wireline and wireless business experienced growth at 2.4% and 5.7%, respectively. The EPS was $0.71, a year-over-year increase of 7.6%.

What I like about AT&T is its strong cash flow and decent cash return to its shareholders. The second quarter free cash flow reached $5 billion, while AT&T has returned more than $5.7 billion in cash to shareholders in the quarter.

For the full year, AT&T expects the continuing growth in wireless service and wireline consumer with revenue growth of more than 2%. Its EPS growth is estimated to be in the upper-single digits or higher. AT&T has always been a great stock for income investors, with consistently increasing dividends. Its dividend per share increased from $1.16 in 2003 to $1.77 in 2012. It is trading at $35.70 per share, with the total market cap of $190.40 billion. The market values AT&T at around 9.28 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). It offers investors quite juicy dividend yield at 5%.

America Movil seems to be a better pick

In June, AT&T reduced its stake in America Movil (NYSE: AMX) by 7.5% by selling shares in the open market in the period of May 7 to June 4. The move brought in $564 million. Interestingly, as billionaire Carlos Slim kept repurchasing America Movil shares, AT&T still hold the same 9% stake in America Movil after the sale.

In February, America Movil dropped significantly from $25.55 per share to around $19 per share. The sudden dramatic drop was due to Mexican president Enrique Pena Nieto’s bill to break up its monopoly position in Mexico. Carlos Slim has taken advantage of the low share price to buy back the company’s shares on the market.

America Movil is a major communication player, operating in 18 countries in Latin America. It has the biggest market share in three countries, Mexico, Colombia and Ecuador and is the third biggest player in Brazil.

The company is quite bullish about its aggressive deployment move for 4G. It reported that it already has 4G covered in 11 cities in Mexico and 18 cities in Brazil. The company planned to build a common 4G platform in Latin America soon. It was not about the electronics with 4G, but the underlying fiber platform.

Value investors might prefer America Movil over AT&T with its much lower valuation. It is trading at around $21 per share, with the total market cap of $75.70 billion. The market values America Movil at 5.5 times its trailing EBITDA. Its dividend yield is much lower, at only 1.60%, but with a low payout ratio at only 12%. Despite AT&T’s high dividend yield, what worries investors is AT&T’s high payout ratio at 131%. If America Movil only pays 100% of its earnings in dividends, its dividend yield could reach as high as 13.3%.

Verizon Communications is growing its wireless segment

Another big peer, Verizon Communications (NYSE: VZ), also has a much lower valuation than AT&T. It is trading at $50 per share, with the total market cap of $143.17 billion. The market values Verizon at only 5.9 times its trailing EBITDA. Income investors might also like Verizon’s nice dividend yield at 4.10%; however, the company pays its shareholders dividends nearly four times higher than its earnings. The greatest asset of Verizon is its wireless business, which enjoyed consistent growth in revenue and cash flow.

In the second quarter, the service revenue came in at $17.1 billion, an 8.3% year-over-year growth compared to its revenue of $15.8 billion in the second quarter last year. Its EBITDA experienced a 10.2% year-over-year increase, to $8.5 billion. The business is considered a cash cow, generating as much as $9.5 billion in the first half 2013, much higher than a $7.8 billion free cash flow in first half 2012. For the full year, Verizon expects to raise its capital spending to $16.4 billion-$16.6 billion from the previous guidance of $16.2 billion due to higher demand for wireless data consumption and advanced wireless service spectrum deployment.

My Foolish take

AT&T does not seem to be a good pick at its current price due to its high valuation and the unsustainably high payout ratio. Personally, I like America Movil the most with its global leading position in emerging markets including Mexico, Colombia, Ecuador and Brazil. Moreover, it has a low valuation and quite a conservative payout ratio. Instead of paying out in dividends, Carlos Slim uses the cash to repurchase its shares right after the significant drop, and for acquisitions to further expand America Movil's business. Looking forward, America Movil will deliver sweet returns for its shareholders in the long run.

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Anh HOANG 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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