As my regular readers know, I've been officially negative on domestic telecom stocks since March 2004. Since then, BellSouth
The short story is that these companies are facing more competition in their core markets than ever before. Certainly, there are promising new technologies that could help these firms improve their grip on customers. But most of these options will require sizable up-front investment, and there's no guarantee that the payoff will be worth the cost.
All told, these stocks turned out to be fairly good pans, and I don't see many reasons to change my opinion. That said, however, I have seen opportunities in the foreign telecom markets. After all, communications companies are still cash flow machines -- and since many foreign markets offer more compelling valuations, higher dividend yields, and less competition, that's the place to be.
One of my long-distance calls in this arena has been Telecom New Zealand
I recently had the pleasure of vacationing in New Zealand for a few weeks. Though my wife and I had our fair share of adventure (from climbing glaciers to exploring Waitomo's Caves), the trip wasn't all play. While there, I took the opportunity to sit down with Telecom NZ's Chief Operations Officer Simon Moutter.
He was an impressive manager, yet easy to talk to. I think a good way to describe him would be to say that he seemed to possess the right amounts of both reflection and action. That is to say, he has vision, but he isn't paralyzed by it -- he's not afraid to make a decision and act upon it.
When I caught up with him in his high-rise Auckland office -- which boasts an excellent view of the city, by the way -- he had some interesting things to say about both Telecom NZ and the markets in which it operates.
On the general telecom market
Moutter started us off by slotting New Zealand's telecom market into three segments. He noted that about 40% of customers would likely always choose Telecom NZ because, as the incumbent, it's what they've always known and they have no interest in changing. Another 40% of the market is driven more by quality or price, so these guys are basically 50/50 as to whether Telecom NZ can land them. Finally, the remaining 20% is made up of folks who will always choose an upstart service or other competitor and never use an incumbent.
The good news in all this is that knowing it allows you to be more efficient in your marketing approach, and the company has done a good job of focusing its efforts only on the 40% of the market that it can change.
On market share
When I asked about how Telecom NZ's brand has translated into market share, Moutter said, "When I started two years ago, I was told we wanted 100% of wireline profits and 50% of wireless profits in New Zealand. Honestly, when [CEO] Theresa [Gattung] asked me to do that, I thought I would quit (laughs). [The challenge] had already ruined a couple of careers. But in my mind, we were simply on the wrong path. For example, we had bad wireless handsets. I mean, not inferior, just wrong in terms of what customers wanted. The things I saw were fixable, and we've fixed them. We're now the best consumer marketer in New Zealand. And we have the best handsets, both in terms of quality and desirability."
I imagine all of that is why Telecom NZ recently stole wireless market share from main competitor Vodafone
Further, Australia's dominant provider, Telstra
On the dividend
When I told Moutter that the company had clearly made the dividend a priority, he had this to say:
"The indication is that we're not going out into the world and buying up a bunch of crazy ideas [with our cash]. The fundamentals of the core business are so compelling and we generate such significant cash flows, we think the best thing to do is pass those profits on [to shareholders]. We're much more about protecting and enhancing shareholder value than chasing unproven growth stories. That said, there are certainly [growth] opportunities out there. For instance, the margins in delivery of wireless entertainment -- from ring tones to streaming video -- are extremely compelling."
One thing about being first is that you have the oldest network. To that end, the company is going to shift to the higher end of its capital expenditure range in the coming year, and that could slow dividend growth. Still, it should continue to pay out a considerable piece of profits to shareholders. Based on the current price of about $32 per American Depositary Receipt (ADR), shareholders can expect a minimum 8.13% dividend yield over the next 12 months.
This company may be Down Under, but its dividend is clearly over the top. Given the yield and the value in the shares, Telecom NZ is worth a look.
And if you like the sound of significant dividends, consider a free trial to Motley Fool Income Investor. If you're not 100% satisfied, you won't pay a dime -- guaranteed.
Mathew Emmert likes to reach out and touch dividend-paying stocks. He owns none of the companies mentioned in this article. The Motley Fool is investors writing for investors.
