It hasn't been a great few years to own telecom stocks. Just take a look at the three-year performance of five of the largest names in the industry:
- Verizon (NYSE:VZ): down 10%
- Vodafone (NYSE:VOD): up 22%
- AT&T (NYSE:T): up 2%
- BellSouth (NYSE:BLS): up 13%
- Deutsche Telekom (NYSE:DT): up 26%
Sure, you could have done a lot worse since 2003. But with some select opportunities, you also could have done much, much better.
Yet there's good reason the market has frowned on telecoms lately. Overinvestment in communications technology during the bubble depressed prices and, in turn, drove down margins. Moreover, with new technologies such as Vonage and Skype developing rapidly, future growth is uncertain. Sprinkle in the ever-present specter of government regulation, and it's clear that telecommunications is not a surefire investment bet.
But is all telecom a bad investment? In a word: No.
The future is green
While today's telecom landscape is slow-growing and competitive, the industry continues to produce lots of cash. Consider that Verizon -- stuck operating in the hypercompetitive United States -- produced nearly $9 billion in profits on $75 billion in revenue over the past 12 months. Free cash flow was nearly $6 billion.
The fact is that the fixed-line business hasn't eroded as quickly as predicted, and -- surprise, surprise -- yesterday's giants are investing in tomorrow's technology. And while growth may be slow, growth isn't as important when there's cash to be had.
Foreign currency
Even though Verizon pays a greater than 5% yield, its competitive position is uncertain going forward. Because Verizon is a domestic operator, it's difficult to predict its cash position in a few years. Remember: The U.S. market is cutthroat. That's not the case, however, in some other countries, where the domestic operator holds a firm grip on communications.
Since 2003:
- Telecom New Zealand (NYSE:NZT): up 104%
- Philippine Long Distance Telephone: up 623%
And even more incredibly, Telecom New Zealand sports a yield north of 8%, while Philippine Long Distance Telephone yields more than 3%. Those are incredible dividend and capital gains returns from a sector that many left for dead.
Fool dividend guru Mathew Emmert has not given up on the industry. He's recommended six select telecom opportunities (including Telecom New Zealand) that are poised to beat the market. You can click here to try out his Motley Fool Income Investor newsletter free for 30 days. It gives you unrestricted access to all of his research and recommendations.
Foolish final thoughts
Many investors have left telecom for dead. Don't make that same mistake. Tread carefully in these waters, and remember that (1) cash is king and (2) foreign lands shouldn't be overlooked. The next three years may be brighter than the past.
Tim Hanson owns shares of Philippine Long Distance Telephone. Vodafone is a Motley Fool Inside Value recommendation. No Fool is too cool fordisclosure ... and Tim's pretty darn cool.
