Want High Yields? Dial Up Foreign Telecoms

Advertisement

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 Enlarge
TEO 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.

Portugal Telecom


Click to Enlarge
Is it safe to buy Portugal again? It’s impossible to say, despite the improved outlook for Europe in recent weeks. Even if the debt crisis rears its head again, however, Portugal Telecom shares provide a margin of safety. In addition to the fat 6.9% yield, PT shares trade at a PEG of 0.5 and a price-to-sales ratio that’s less than 40% of the five-year average (0.64 versus 1.63).

For this, we can thank the broad downturn in peripheral Europe in 2011. Like many European telecom stocks, PT was a victim of its status as one of the largest holdings in its local benchmark. This has created an opportunity to buy low on a company that has a favorable growth outlook and that earns roughly half of its revenues outside of its home country. PT shares have jumped 14% in the past week, which could be construed as a missed opportunity or the first signs of life in a stock that had been left for dead. Given Portugal Telecom’s valuation and attractive yield, the latter appears the more likely.

Partner Communications


Click to Enlarge
PTNR is an Israel-based wireless provider that traded in the low $20s as recently as 2011, but whose shares have collapsed to $8.55 because of concerns about stiffer competition in the Israeli market. But at its current valuation level, the stock merits consideration. Partner trades well below its historical average in terms of price-to-sales, and it is selling for 5.3 times trailing earnings and 1.6 times forward estimates.

There’s no doubt that this company is growth-challenged, but the dividend yield appears safe, as the company has a manageable debt load ($1.45 billion) and high free cash flow ($458 million, TTM) to cover its obligations. With the stock having fallen so far in the past year, the risk-reward profile appears favorable for an investor looking to take advantage of the high dividend.


Click to Enlarge
An investor looking to spread his or her risk could pair Partners with its primary competitor, Cellcom Israel. CEL has higher debt and similar growth challenges, but an equally low valuation and a dividend two points higher than PTNR at 9.9%.

The Bottom Line

Telecommunications isn’t the exciting sector it was back in the “TMT” days, but those willing to look overseas will find an abundance of high-yielding companies with low valuations. For yield-oriented investors, it just might be the final frontier.


Article printed from InvestorPlace Media, https://investorplace.com/2012/02/want-high-yields-dial-up-foreign-telecoms/.

©2024 InvestorPlace Media, LLC