7 Telecom Stocks to Ring in the New Year

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This may come as a surprise, but the telecom industry is maturing. It's gone from a hot, high-growth sector to one with more predictable cash flows, earnings deceleration, and dividends.

As more people use wireless devices and as Internet usage increases, these devices and services have shifted from discretionary to necessary. People need them to function in today's society. According to a recent Morningstar report, more than 80% of the U.S. population has a wireless phone -- double the percent in 2000. Today 75% of Americans use the Internet, up from 44% eight years ago.

Have you missed out on the telecom growth wave? The answer is no. There are still opportunities for growth in this industry. Analysts still see an uptrend in demand for wireless devices. Morningstar estimates smartphone sales will grow at a breakneck pace of 30% for the next couple of years.

What doesn't kill you only makes you stronger
The credit tempest threatens to damage even the strongest industries in the short term. Capital expenditures for the telecom industry are expected to decline in 2009, as the broader economy weakens. While it's possible that business in 2009 will decline somewhat, core service offerings will probably sustain telecom companies through the recession.

Those that implement strategies to weather the downturn, such as internal cost cutting, will become more efficient. AT&T (NYSE: T), for example, recently announced taking an ax to some 12,000 jobs. While in the near term merger and acquisitions activity will likely slow down, as asset prices decrease, opportunities for acquisitions will rise. Smart companies could do well, depending on cash positions and access to credit. In addition, companies that operate in emerging markets, like Motley Fool CAPS four-star rated China Mobile (NYSE: CHL), where the financial crisis isn't yet as severe, may fare better.

Help to find the strong
To find winning companies in the telecom industry I used the CAPS community's screener. I searched for companies in the telecom industry with ratings of four or five stars, the highest two ratings from our CAPS community. (During the first 20 months for which we have data, four- and five-star companies have outperformed the market, with average annualized gains of 7% and 12%, respectively.)

I further refined the search as follows:

• Dividend yield of 5% or greater.
• Long-term debt/equity ratio less than two, to ensure the use of not too much leverage, even though this is often a capital-intensive business.
• Current ratio greater than one to help ensure liquidity.

Here are some of the results from this screen, which you can also run or modify. For comparison's sake, I've also included Verizon (NYSE: VZ), China Mobile, and AT&T.

Company	Market Cap (billions)	Dividend Yield	LT Debt/Equity	Current Ratio
AT&T	$165.77	5.8%	0.53	0.5
Brasil Telecom (NYSE: BTM)	$1.83	8.4%	0.63	1.5
China Mobile	$199.24	3.2%	0.08	1.3
Chunghwa Telecom (NYSE: CHT)	$14.41	6.9%	0.0	1.6
Nokia (NYSE: NOK)	$58.14	5.1%	0.01	1.4
Partner Communications (Nasdaq: PTNR)	$2.43	8.1%	1.29	1.0
Verizon	$94.93	5.5%	0.74	0.7

Source: Motley Fool CAPS.

Remember, the CAPS screen should be only the first step in your investment research. From there, look for telecom companies that have strong balance sheets, a solid position in the market, dividends, and have shown a history of increasing their dividends. It's important to pick the strongest players because if business declines in this downturn, the amount of cash the company was accustomed to operating with may not be enough to cover its obligations. You should also research the countries the companies operate in because "average revenue per customer," a common measure of success for the telecom industry, varies from country to country.

Start ringing up returns for your portfolio at Motley Fool CAPS today! Let the collective wisdom of our 125,000-member investment community help you make better investing decisions.

For related Foolishness:

• Can You Win With This Telecom Stock
• Palm About to Go Nova
• The Coming Tech Boom  

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