The Best Emerging Markets Telecom Play

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We feel that Vodafone (NASDAQ: VOD) is an overlooked mobile communications company, and for no particularly good reason. Weakness in Europe, namely Italy and Spain, has pushed the stock down 12% during the last three months.

Vodafone is among the top income investments in its industry, and continues to reward shareholders with regular dividends. Vodafone is also due to receive a dividend of $8.5 billion from Verizon Wireless, which it plans to use for share repurchases. The company calls billionaire Ken Fisher - founder of Fisher Asset Management - one of its biggest shareholders after adding the telecom to his portfolio in 3Q (check out Ken Fisher's newest picks).

Vodafone has admittedly seen weakness in its European markets, but does have strong penetration in emerging markets. Vodafone also appears to be way ahead of major European peers in terms of upgrading to 3G. The telecom is already focusing on 4G expansion in South Africa and certain European countries, including Germany and Italy.

It appears that Vodafone has room to grow in the smartphone market, where only 50% of its current customer base is made up of smartphone users. Vodafone's 6% dividend yield has held up nicely through the weakness thanks to its cash position - over $7 billion on hand - and strides to increase liquidity and fix its balance sheet, with the exit of all minority holdings like China Mobile and Softbank. From a valuation standpoint, Vodafone's 10x forward earnings multiple is well below its peers, as both AT&T and Verizon trade well above 40x earnings.

Sprint Nextel (NYSE: S) is the third largest wireless provider in the U.S. and is seeing positive growth, where revenues are expected to be up 4% this year. We believe that Sprint now has key potential to increase its LTE and 4G buildout with the investment from Softbank - $20 billion for 70% ownership - and the pending acquisition of Clearwire. Part of the $20 billion is expected to be used for acquisitions that will allow Sprint to further expand its spectrum capabilities. Billionaire David Einhorn of Greenlight Capital was one of Sprint's big-name investors last quarter with over 26 million shares (see David Einhorn's newest picks).

Who's the best of the rest?

France Telecom (NYSE: ORAN) operates across Europe and other markets that are expected to see weakness over the interim. Revenues are expected to be down 2% in both 2012 and 2013. Competition in the telecom's main market - France - is also expected to remain tough, but a positive is the company's plans to expand into faster growing markets, including continued expansion in Africa. Worth noting is that France Telecom does pay a dividend yielding 16%. Helping continue to fund this dividend will be possible disposals of underperforming assets, namely in Portugal.

AT&T (NYSE: T) is another dividend-paying telecom, with a yield of 5.4%. Wireless revenues are expected to be up 5% in 2013, on the back of customer additions. AT&T is also trying to keep pace with Verizon in the spectrum and coverage race, and recently launched its 4G LTE network in ten new cities. The wireless company also announced that the FCC approved its acquisition of NextWave Wireless and WCS spectrum. Billionaire Ray Dalio of Bridgewater Associates calls AT&T one of his top dividend stocks (see Ray Dalio's big bets).

Verizon (NYSE: VZ) has some of the more robust spectrum assets. Verizon's dividend - yielding 4.8% - is not quite as generous as AT&T's, but it does appear that Verizon is the better value. Verizon trades at only 1x sales, whereas AT&T trades at a 50% premium. While AT&T is expanding its LTE network, Verizon is also keeping pace, investing $240 million in network enhancements in Florida recently. This investment has gone toward offering 4G LTE to Verizon customers throughout the state.

In short, we believe that Vodafone's access to emerging markets makes it a more compelling investment when compared to other dividend-paying telecoms like AT&T and Verizon.

This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has long positions in T and VOD. The Motley Fool owns shares of France Telecom (ADR). Motley Fool newsletter services recommend France Telecom (ADR), Vodafone Group Plc (ADR), and Vodafone Group Plc (ADR). 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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