In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.
Today's matchup is AT&T (NYSE: T ) vs. Windstream (Nasdaq: WIN ) vs. Telecom New Zealand (NYSE: NZT ) .
In the telecom space, there have been three types of dividend plays that have sported particularly tempting dividend yields.
- Big domestic carriers such as Verizon (NYSE: VZ ) , AT&T, and CenturyLink (NYSE: CTL ) (which is in the process of acquiring Qwest). Their dividend yields are 6.5%, 6.3%, and 8.1%, respectively.
- Rural landline-focused carriers such as Frontier Communications (NYSE: FTR ) and Windstream. Yields of 9.7% and 8.8%, respectively.
- Foreign carriers with dominant positions such as Turkcell (NYSE: TKC ) (56% of the mobile subscribers in Turkey), and Telecom New Zealand, the former landline monopolist that also has 45% market share in the mobile market. Yields of 4.1% and 11.7%, respectively.
The biggest dividend yield does not the best dividend play make. No, we care about the sustainability of that dividend and the prospects of the company as a whole. Using five short-of-scientific-but-carefully chosen criteria, let's determine which of these dividend plays (one from each type) -- AT&T, Windstream, and Telecom New Zealand -- is the best buy.
Round 1: Balance sheet
AT&T is the winner here with a 0.7 debt-to-equity ratio. It covers its interest seven times over with earnings before interest and taxes. Windstream is the most levered with 10 times more debt than equity. It only covers its interest at 2.2 times EBIT. Rank: 1) AT&T, 2) Telecom New Zealand, 3) Windstream
Round 2: Operations
For operations, let's look at operating margins. Windstream goes from worst to first here, generating operating margins above 30%. Compare that to AT&T's 18% and Telecom New Zealand's 12%. Rank: 1) Windstream, 2) AT&T, 3) Telecom New Zealand
Round 3: Safest bet
AT&T operates in some mature-to-declining markets, but it gets the nod here based on its size, market position, and balance sheet. Windstream's situation isn't as precarious as its 2.2 EBIT/interest ratio would suggest. Its free cash flow outstrips its net income, and it handily covers its hefty dividend payments. Rank: 1) AT&T, 2) Windstream, 3) Telecom New Zealand
Round 4: Sexiest bet
All three have sexy dividends. Telecom New Zealand adds the international exposure; AT&T has iPhone exclusivity ... for now; Windstream's rural telecom business isn't sexy but its dividend trumps AT&T's. Rank: 1) Telecom New Zealand, 2) Windstream, 3) AT&T
Round 5: CAPS rating
Our CAPS community likes Telecom New Zealand the most, rating it five stars (out of five). Windstream gets four stars, and AT&T gets three stars. Rank: 1) Telecom New Zealand, 2) Windstream, 3) AT&T
The summary rankings
|
Category
|
AT&T
|
Windstream
|
Telecom New Zealand
|
|
Balance sheet
|
1
|
3
|
2
|
|
Operations
|
2
|
1
|
3
|
|
Safest bet
|
1
|
2
|
3
|
|
Sexiest bet
|
3
|
2
|
1
|
|
CAPS rating
|
3
|
2
|
1
|
|
Average finish
|
2.0
|
2.0
|
2.0
|
For the first time since I've been doing this series, we have a three-way tie. The last telecom battle was tight, too, but despite three distinct telecom plays, the numbers evened out perfectly on AT&T, Windstream, and Telecom New Zealand.
But what do you think? Declare your winner in the poll below, and then share your thoughts in the comments box below the poll.
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