2 High-Yielding Telecoms to Buy For Your Portfolio

AT&T and Verizon both make great high-yielding, defensive investments with potentially improving growth prospects.

Jul 22, 2014 at 11:00AM

Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) operate as a duopoly in the United States, enjoying their status as "cash cows." Growth has slowed since the days of the smartphone boom, however. Both companies have also underperformed the market this year. Most investors buy these stocks solely for yield, but should they? 

All about the dividends
AT&T offers a dividend yielding over 5%, compared to Verizon's yield of around 4.30%. Telecommunications companies tend to pay dividends out of free cash flow, so that's the metric that's probably best to look at to determine the health of these dividends.

Last quarter, AT&T revealed it's expecting around $11 billion in free cash flow for both this year and 2015, as it continues to invest in its network. The company paid nearly $10 billion in dividends over the past year. The company's CEO also indicated that 2014 would be a "peak year" for VIP spending, so CapEx could also be a tailwind starting next year. This should open up more free cash flow to shareholders.

Verizon's situation is more unique, due to its recent deal with Vodafone (NASDAQ:VOD). Verizon reported around $3 billion in free cash flow during its most recent quarter. This was higher by $1 billion year-over-year, and largely attributed to the extra free cash flow the company gets to keep after buying out the remaining 45% of Verizon Wireless from Vodafone.

To sum things up, both telecoms pay out relatively safe, sustainable dividends. These dividends are both high-yielding, and while AT&T currently gets the slight edge, Verizon's dividend may grow at a faster pace going forward.

But what am I paying for the dividends?
Both Verizon and AT&T are currently valued around 10-11 times trailing twelve month earnings. 

T Price to Free Cash Flow (TTM) Chart

T Price to Free Cash Flow (TTM) data by YCharts

Verizon is much cheaper when looking at its price in relation to its free cash flow, however. Valuation-wise, Verizon wins this battle.

Future growth prospects
I wasn't surprised to see that Vodafone is deciding (post-Verizon Wireless) to expand further into Machine-to-machine communications. The company announced in June that it will be taking over Cobra Automotive Technologies, a global provider of security and telematics solutions to the automotive and insurance industries. Vodafone's director of M2M, Erik Brenneis, said that, 

"The combination of Vodafone and Cobra will create a new global provider of connected car services... We plan to invest in the business to offer our automotive and insurance customers a full range of telematics services."

It's also no surprise that Verizon and AT&T are also getting into this lucrative future growth market. The number of Internet-connected cars is expected to grow sixfold by 2020, and Verizon has already struck deals with Toyota, Mercedes Benz, Hyundai, and Kia Motors to provide services such as infotainment and remote vehicle diagnostics. During its last quarter, Verizon's telematics and M2M revenues saw growth in excess of 40%. AT&T also inked deals with Tesla, Audi, and General Motors

The connected-car is only one subset of a burgeoning wave of connected devices. The Internet-of-Things, or IoT, will connect most physical devices to the Internet, which in turn will generate massive amounts of data usage for both U.S. telecoms to feed off of for growth. Gartner expects the IoT market to grow to 26 billion units by 2020, excluding things like Tablets and PCs, while also adding trillions of dollars to the global economy. 

Foolish bottom line
Both AT&T and Verizon offer above-average yields and are positioning for what could be a very lucrative growth market down the road with the IoT. An injection of solid growth into these companies could potentially shift the market's perception of them as slow-growing bond substitutes. This is why I think that these companies should be considered as investments in the future of the Internet, as opposed to stocks bought only for yield.

In the meantime, both companies currently trade at a discount to the overall market. Why not own both? Sometimes the best offense is a good defense, and both of these companies make good defensive investments for your portfolio in today's market environment. They will likely even have a growth spurt coming over the next few years as well. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Joseph Harry owns shares of AT&T; and Verizon Communications. The Motley Fool recommends Apple, General Motors, Tesla Motors, and Vodafone. The Motley Fool owns shares of Apple and Tesla Motors. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers