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. 

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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.

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.

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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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