One Trend That Could Please AT&T, Verizon, and Vodafone Investors

There's an old saying, "the trend can be your friend." For investors in wireless service providers such as AT&T (NYSE: T  ) , Verizon Communications,  (NYSE: VZ  ) , and Vodafone Group (NASDAQ: VOD  ) , there's a trend that could pay off.

During 2013, the amount of mobile wireless data transferred worldwide exceeded 18 exabytes, or 18 billion gigabytes. At the height of the Internet boom in 2000, the total amount of digital information exchanged, including over fixed networks, was just one exabyte.

Mobile traffic has been increasing exponentially over the last several years and shows no sign of letting up. A recent forecast predicts that by the year 2018, the amount of data sent through mobile devices alone will top 190 exabytes, and it will increase at a compounded annual rate of 61%.

Mobile giants
American companies AT&T and Verizon are fighting each other for a piece of the domestic mobile bonanza and will benefit over the long run as more people and machines are connected to their cellular and Wi-Fi networks. 

The two companies have been the only ones in the industry consistently signing up more users, and that is expected to continue. Note that Leap Wireless is now part of AT&T after a recent acquisition.

Source: Strategy Analytics 

AT&T is planning for future growth by modernizing and expanding its 4G/LTE infrastructure to meet the increase in demand. The Dallas-based company is currently spending around $22 billion a year on capital expenditures and has increased spending by about 5% a year over the past half-decade. Capital seems to be targeted toward the wireless side of AT&T's business at the expense of the wired portion. 

Right now, AT&T stock can be had relatively inexpensively. The P/E, on a trailing 12-month basis, is 10.5, below both its peers and the market. The company pays a nice dividend of $1.84 and has increased it every year over the last quarter-century. With a payout ratio of only 53%, and with earnings projected to increase both this year and next, the payout looks sustainable. Investors can profit while waiting for all that growth in data usage.

Top-ranked Verizon will also likely see a boost in revenue and profit because of the anticipated industry trend, along with the deal to purchase from Vodafone the 45% of Verizon Wireless that it didn't already own, and the fact that its infrastructure expansion is well under way. 

Most of the country now has access to Verizon Wireless 4G/LTE service and instead of sharing with Vodafone, the company can now reap all of the benefits of its success. One downside might be the $49 billion in bonds that Verizon had to issue to close the deal. However, in today's relatively low interest rate environment the risk is somewhat mitigated.

Investors who believe that the long-term benefits of the transaction outweigh that risk should take the plunge in Verizon shares, which are reasonably priced at a trailing 12-month P/E of 11.5, well below industry and market averages. The stock yields a hefty 4.3%, and the dividend has been rising at a 3% rate over the last five years. With a payout ratio of less than 50% and plenty of free cash flow, its dividend looks sustainable. 

Continental push
Mobile wireless usage will grow fastest in Africa, the Middle East, and Central and Eastern Europe. The U.K.-based Vodafone is poised to capitalize on this trend within the trend. The company is flush with cash after divesting its stake in Verizon Wireless, and after returning two-thirds of it to shareholders, it will spend the rest to reduce debt and to expand in a market that has plenty of room to grow. Vodafone now has a war chest that is much bigger than anything its competitors on the continent can build up anytime soon.

For investors needing an income stream, Vodafone now pays a nice dividend of $2.47 and currently yields about 7%. Since the payout ratio is just 22%, and the latest estimates indicate earnings growth will pick up, the dividend looks good.

Vodafone investors, already enriched from the Verizon deal, will continue to prosper for some time to come.

Foolish conclusion
The trend in mobile wireless usage is up in a big way. Service providers AT&T, Verizon Communications, and Vodafone either have plans for -- or have already completed -- expanding to meet the demand for more data. Investors will clean up from the anticipated growth in the market.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2014, at 5:02 PM, rw1270 wrote:

    How did you get $2.47 dividend, Mr. Moreli? From Yahoo! ? Yes, I thought so. It would be nice, if authors made some real reseach, but why, oh why do it, if it pays just the same, right?

    If you still don't know what I'm saying, here it is: Vodafone, like many other UK companies pays two unequal installments (smaller "interim" and larger "final", thus you cannot annualize last payment (like Yahoo! does). The next payment (winter) will be less than half of the last (summer). The actual expected dividend yield is about 5.4% (depending if they raise it or not), not bad, not quite 7%.

  • Report this Comment On June 26, 2014, at 6:43 AM, Mathman6577 wrote:

    Thanks for the comments Mr. Rw1270 :)

    The source for the dividend information is: http://caps.fool.com/Ticker/VOD.aspx. If you feel that is wrong I recommend writing to the appropriate staff member.

    (Yahoo finance has similar results.)

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