3 High Yield Telecom Companies to Buy

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

The Telecommunications sector has seen several ups and downs in the recent past. With the rapid technological changes (like LTE) taking place in this field, no one can be certain about the performance of any company in this sector. However, the three telecom companies that I have picked here for analysis have been known for providing good returns to their shareholders.  The three companies mentioned below have a high dividend yield and have solid business models.

<table> <tbody> <tr> <td> <p>Company Name</p> </td> <td> <p>Forward Annual Dividend Yield</p> </td> </tr> <tr> <td> <p><strong>Century Link</strong> <span class="ticker" data-id="203234">(NYSE: <a href="http://caps.fool.com/Ticker/CTL.aspx">CTL</a>)</span></p> </td> <td> <p>7.50%</p> </td> </tr> <tr> <td> <p><strong>AT&T</strong> <span class="ticker" data-id="205637">(NYSE: <a href="http://caps.fool.com/Ticker/T.aspx">T</a>)</span></p> </td> <td> <p>5.30%</p> </td> </tr> <tr> <td> <p><strong>Frontier Communications</strong> <span class="ticker" data-id="203275">(NASDAQ: <a href="http://caps.fool.com/Ticker/FTR.aspx">FTR</a>)</span></p> </td> <td> <p>9.20%</p> </td> </tr> </tbody> </table>

Source: Yahoo! finance

Frontier Communications

Frontier Communications reported its 3Q 2012 earnings with its operating income increasing to $275.2 million up 52.6% year over year (Y/Y), driven by reducing depreciation and amortization expenses, although it reported total revenue of $1,252.5 million, down by 3% Y/Y. The decreasing revenue and falling shares (~18% year to date) might be a concern for its investors. But taking into consideration its plans for the long haul, I am pretty sure that it will regain its customer base and improve its financial performance.

Although the company’s 3Q 2012 earnings did not fulfill the market expectations, Frontier is still one of the best dividend-paying Telecom Company in the sector. It announced a dividend yield of 8.80% ($0.10 per share), a cut from $0.188 announced earlier. This dividend cut is part of a cost saving target of $100 million as decided by the company, which is to be achieved by 2013. These savings will be utilized for reducing the company’s debt levels, hence creating a strong balance sheet.

On the other hand, there are several new products lined up to increase the customer base of the company and to generate a higher revenue yield. Frontier has also launched a promotional offer of $100 to $500 in Apple gift cards for existing and new HIS (High Speed Internet) customers who purchase its double or triple play bundle services. These offers are always a preferred choice for the consumers as they provide premium services at a discounted price.

Secondly, for residential or small-business customers, Frontier launched Simply Broadband (Oct. 12) in partnership with Hughes Net satellite, and achieved 3,000 sales within four weeks of the launch. For this new service the target as set by company is 750,000 households. Third, a new VoIP and broadband product called ‘Tandem’ has been launched for small businesses, which provides a competitive advantage as it is priced more than 25% below that of its competitors.

Summing up, I believe the stock should rise in the coming time given its prospective new products plans and increasing market base as seen in the newly launched products offset. Hence I rate the stock as a buy.

AT&T

Whenever we have to review how AT&T is performing, we must compare the company with its closest competitor Verizon Communications. In the last 1 year, Verizon found its stock gaining ~13%, while AT&T has seen a gain of only ~9%. But, looking at its planned investment initiatives for the next three years, which is expected to enhance its wireless and wireline networks, I feel the stock is well placed to show an upward movement. Let’s have a look at its growth drivers.

AT&T, in an aggressive strategy is going to invest ~$14 billion in Project VIP (Project Velocity IP) over the next three years for the expansion of its LTE network to meet the customers’ demand for high speed Internet access, cloud service, mobile and apps. This includes $8 billion for wireless and $6 billion for the wired services.

  1. Wireless Broadband Plan: AT&T is planning to cover 250 million people at the end of 2013 and 300 million at the end of 2014.
  2. Wireline Broadband Plan: The company aims to expand its wireline IP from 25 million locations to an impressive 57 million at the end of the year 2015.

This network expansion will further provide enhanced Business Solutions for the enterprise customers in four key growth areas (i.e. strategic network services, cloud, security, and mobility solutions) that will expand its market opportunities. On the other hand, its consumer services (unified communications, security, cloud, API, and VPN/Ethernet/LTE) are expected to add ~$224 billion by 2015. Project VIP will also support new growth initiatives in mobility such as AT&T Digital Life, Mobile premise solution, Mobile wallet, and connected Cars.

Additionally, AT&T’s strong relationship with Apple will further help it in increasing its iPhone subscription. In 3Q 2012 iPhone subscription showed a massive 74% growth (Y/Y).  With the recent launch of iPhone 5, the company should perform better in the coming quarters too. Overall, I feel AT&T to be a safe pick for long term value creation.

CenturyLink

CenturyLink remains positive in the revenue framework as its strategic initiatives are going strong. The company posted an EPS of $0.66 in 3Q 2012, beating the consensus estimate of $0.57, backed by increased demand for network services from the Enterprise customer. We should expect this trend to continue because of the strong bookings.

Its acquisition of Ciber Inc’s IT outsourcing business will help its Savvis division, both Savvis and Ciber has been partners since 2011  providing data center support services. This acquisition will help the company to grow its  IT outsourcing services.  Its successful integration of Savvis and Qwest Communication will help to enhance CenturyLink's position as a global communications leader. Qwest integration is expected to bring synergy of ~$460 million by the end of this year, which is a testament to the company’s strategy for driving growth.

Savvis has launched its Cloud Database Services, the Savvis Symphony Database in Europe, which is scalable, less expensive, and is provided as a pay as you go portal for the SMB's. CenturyLink's Saavis has been successful in its traditional business, but this new initiative will help it to open a completely new market that should reflect positively in 2013.  Additionally, CenturyLink will be launching its Prism TV IPTV service into Phoenix as the first legacy Qwest market to receive Internet-based TV service. The company has previously experienced more than 90% broadband pull through Prism TV sales and this expansion will enable an increase in its subscriber growth in the coming months.

Furthermore, the company's Free Cash Flow stands at ~$905 million, up by ~16% from the last quarter, and a fair forward P/E of 15.45x.  Looking at all these factors, I feel CenturyLink is a well-managed company which has seen success in terms of integration and will continue to provide good return to shareholders in the long run. I would recommend buying this stock.

 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T.; 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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