Which Domestic Telecom Is the Best Buy?

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The telecommunications sector is where many investors look for slow-and-steady growth and dependable income.  Growth in the sector isn’t likely to make headlines, but in exchange investors are presented with solid free cash flows, and dividend yields of more than twice the yield on the S&P 500.  Here are three domestic-based telecom companies that may be worth further research:

AT&T (NYSE: T) is the telecom giant of the United States.  The stock has a market capitalization in excess of $190 billion.  Through the first nine months of 2012, net operating revenues were up a little less than 1% versus the prior year.  AT&T trades at a reasonable valuation, with a price to book ratio of less than 2.0 and an enterprise value-to-EBITDA ratio of about 7.  The stock currently pays a dividend of $1.80 per share, which equates to a current yield of about 5.3%.  AT&T has raised its dividend at a rate of about 2.3% annually over the last five years.  The stock has traded between $29 and $38 per share since the beginning of 2011, which may be attractive for investors who shy away from volatility.

Verizon (NYSE: VZ) is the other major American telecommunications company.  Like AT&T, Verizon also provides internet, telecommunications and television services.  Verizon is smaller than AT&T, with a market value of about $122 billion, but appears to be slightly cheaper than AT&T.  Verizon is trading at lower multiples of its operating cash flow.  The company trades for an enterprise value-to-EBITDA ratio of slightly more than 5.  Verizon’s dividend yield is slightly lower than AT&T’s, at about 4.8%, but it has grown at more than 3.6% annually over the last five years.  Verizon navigated 2012 well, with full-year operating revenues climbing 4.5%.  Verizon’s shares have performed very well recently, increasing almost 20% since the start of 2011.

CenturyLink (NYSE: CTL) might fly under the radar in the telecom sector, but it carries a dividend yield higher than its peers.  CenturyLink provides integrated television, internet, and voice communications services.  Although the company’s third quarter revenue was basically flat from the prior year, its first nine months have been much better overall.  Operating revenues during the first three quarters of 2012 climbed more than 28% versus 2011.  CenturyLink is trading at a valuation in line with its peers, at a P/B ratio of 1.25 and an EV/EBITDA ratio of 6. CenturyLink has declined in price about 10% over the last two years, and its dividend growth has been disappointing—the company hasn’t provided investors with an increased payout since 2009.  However, the yield on the stock is more than 7%, greater than its peer group and almost four times the yield on the ten year Treasury bond.

Each of these companies has shown steady, consistent growth in revenues and cash flows over the past few years.  Growth rates aren’t spectacular, but these stocks offer compelling dividend yields that should be attractive for many income investors.


Robert Ciura 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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