3 Dividend Plays You Can't Miss
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: France Telecom cut their dividend, this article has been amended to reflect this.
The Fed is trying to revive the economy by reducing rates and encouraging consumer spending. The effectiveness of this methodology is debatable but the reduction has definitely increased the demand for dividend stocks. High dividend yields are not common in the technology sector because companies are more concerned about R&D and growth. The telecom industry is an exception with its high dividend yields and earrings visibility. The following three companies have high yields and are reliable dividend investments.
France Telecom (NYSE: ORAN) is one of the world’s largest telecom operators. It provides data, multimedia, transmission, internet and mobile telecommunications services. The company operates under the France Telecom and Orange brand names.
The company offers an extremely high dividend yield. France Telecom generated around $17 billion from operations last year and has been continuously generating more than $15 billion for past five years.
The telecom industry has a high earnings visibility because consumers usually have long term plans. This makes it relatively harder to shift from one carrier to another, resulting in a consistent stream of cash flows.
The global telecom industry has been sluggish due to the global economic slowdown. France Telecom is not different and the company has posted a couple of bad quarters. There is talk of some major M&A activity in the European and American telecom sector and this should revive the industry to some extent. Despite these troubles the OCF yield is high enough to easily pay for the current dividend yield.
The stock is trading at a P/E of 9x, which is almost half the industry average. It is also at a 30% discount to mean sell side target price of $14.30. At these valuations, it is not only a lucrative dividend play but also has a huge upside potential.
VimpleCom (NASDAQ: VIP) provides voice and data services through traditional and mobile broadband. The company offers prepaid and contract plans to its mobile telecommunication customers. It also provides data, voice and internet services to a multitude of corporate clients.
The company has one of the most sound and efficient business model in the entire industry. In this tough economy, the company has managed to maintain an impressive revenue growth rate of 38% while the industry is shrinking by 3%.
The company is trading at a forward P/E of 7.5x which is way below industry average 26x and S&P P/E of 15x. VIP offers a stellar 13.5% dividend yield which is above the industry and sector averages. It generates approximately $7 billion in annual operating cash flows and pay approximately $2 billion in dividends. This gives us an OCF yield of 42%. The high OCF shows that the company can easily manage its 13.5% dividend yield. The company is trading at a 20% discount to mean sell side target price and is an excellent investment for dividend growth and capital appreciation.
The Israel based Partner Communications (NASDAQ: PTNR) offers fixed line and cellular service to a local clientele. The company is the largest telecom provider in Israel and holds a market share of more than 90%. This dominance ensures a steady stream of cash flows from services. The company has suffered from declining growth in the telecom sector and the 5-year average revenue growth is approximately 1.5%.
The company offers an excellent dividend yield of 12.7% and boasts a 5-average dividend yield of 8.8%. Partner generates approximately $0.5 billion in annual operating cash flows which comes down to an OCF yield of 50%. The high OCF yield shows that not only are the current dividends sustainable but there is substantial room for growth as well.
Despite the revenue declines, the high OCF yield ensures the safety of company’s dividends. Partner also offers a significant capital upside because it is trading at a mammoth discount to mean sell side target price of $26. Cheap valuations and a sustainable high dividend make Partner Communications an excellent dividend play.
The S&P 500 index has seen a huge rally since the start of this year. One of the primary reasons behind this rally has been the unattractiveness of debt markets. In this market, dividends are an attractive alternative for fixed income investors. The three companies above are trading at pretty cheap valuations and also offer extremely high dividend yields. Investors should consider them for dividend play but only after thorough due diligence.
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Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends France Telecom (ADR). The Motley Fool owns shares of France Telecom (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!