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

An exponential increase in traffic over the airwaves bodes well for wireless service providers

Jun 25, 2014 at 11:00AM

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.

Mobile Data Traffic

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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Mark Morelli owns shares of AT&T; and Vodafone. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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