The universe of high-dividend stocks has been picked over mercilessly in the yield grab of the past half-year, driving many of the market’s highest-yielding companies to the top of their historical valuation ranges.
There is, however, one area where yields are high and stock prices are depressed: foreign telecoms. Not every stock in this group offers the stability one would have associated with the telecommunications sector in the past, as many face the twin challenges of high debt and stiff competition. Still, the yields in this group are much more compelling than what an investor can find in most areas of the U.S. market right now:
| Stock | Ticker | Yield | Forward P/E |
Return since 12/31/10 |
| Telecom New Zealand | NZT | 11.8% | 15.8 | 15.6% |
| Telecom Argentina | TEO | 10.8% | 6.5 | -14.6% |
| Cellcom Israel | CEL | 9.9% | 1.9 | -47.1% |
| Telefonica (Spain) | TEF | 9.6% | 8.1 | -14.6% |
| France Telecom | FTE | 8.9% | 8.5 | -19.0% |
| Partner Communications (Israel) | PTNR | 7.9% | 1.6 | -54.2% |
| P.T. Telekomunikasi Indonesia | TLK | 7.2% | 12.0 | -9.5% |
| Portugal Telecom SGPS | PT | 6.9% | 5.7 | -39.7% |
| City Telecom (Hong Kong) | CTEL | 6.2% | 8.8 | -13.5% |
| Telecom Italia | TI | 5.7% | 11.6 | -10.8% |
| BCE (Canada) | BCE | 5.3% | 12.3 | 22% |
| Tele Norte Leste Participacoes (Brazil) | TNE | 5.1% | 6.3 | -30.9% |
| Chunghwa Telecom (Taiwan) | CHT | 4.7% | 17.3 | 34.1% |
| Tim Participacoes (Brazil) | TSU | 4.4% | 16.6 | -16.2% |
| Philippine Long Distance Telephone | PHI | 4.2% | 14.1 | 21.8% |
| S&P 500 | 2.3% | 12.8 | 7.3% |
A review of the fundamentals of each of these stocks reveals three names that stand out as opportunities:
Telecom Argentina
Click to EnlargeTEO is a diversified fixed-line and mobile telecom provider with high profit margins, a strong balance sheet and ample free cash flow — all of which indicate the current high dividend is sustainable. Telecom Argentina’s price-to-earnings, price-to-book and price-to-sales ratios are all below its historical average, and the company continues to generate growth on both the top and bottom lines. ROA (19.9% trailing 12-month) and ROE (35.9%) are each well above the industry average. TEO’s median price target is $24.25, versus a current price of $20.08, indicating that there is room for some upside on top of the dividend.
Telecom Argentina stacks up well against its peers by virtually any measure, but there are two negatives to consider. First is volatility — TEO will provide a much bumpier ride than the average telecom stock. The second, and more important, factor is that the unpredictable Argentine government has indicated a willingness to limit the dividends Argentine companies pay to foreign investors. This is an important consideration that needs to be monitored closely, but the stock offers such a compelling profile of growth and value that for now it appears worth taking this risk.
Having said all of this, there’s no rush to buy just yet. Telecom Argentina recently failed at two attempts to take out its 200-day moving average, and it is in jeopardy of falling under its 50-day. It’s probably worth giving up a few percentage points of upside in exchange for better clarity in the technical picture.
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