Over the last 10 or 11 years, there have been several mini-manias for emerging market telecom stocks. One name that used to get lumped in with that group was Telecom Corporation of New Zealand (NYSE:NZT). At times it has had the same ups and downs as the group. I don't think New Zealand has been an emerging market during that time, but what do I know?
Telecom New Zealand has a lot of appeal. First is its dividend yield of 4.9%. Most of the other statistics look compelling, too. It trades at 12.6 times 2005 earnings, operating margins are 29.5%, and return on equity is a sizzling 43%. The dividend payout ratio is solid at 66% and the beta is only 0.87, which means it is less volatile than the market. All these numbers compare favorably to other foreign telecoms.
On fundamentals alone the stock stands out. But there is another aspect that makes the story more interesting: Over the last few years, it has had a low correlation to U.S. markets. If most of your holdings are American companies, it makes sense to own something that zigs when the Standard & Poor's 500 zags. While Telecom New Zealand is not a perfect hedge, it does offer some of this type of protection.
I believe this is because New Zealand (along with Australia and Canada) is thought by some to be what is called a commodity-based economy, while the United States is thought to be a service-based economy. This can cause the United States and New Zealand to be at different points in the economic cycle and the stock market cycle. For example, in the United States, interest rates had been on the decline for years and just recently have started to move higher. Rates in New Zealand, on the other hand, have been relatively high for quite a while. New Zealand sovereign debt that matures in five years yields about 6.2% versus a five-year U.S. Treasury note that yields about 3.62%.
If you are still awake, the takeaway is that both economies are in different places. A company such as Telecom New Zealand may be a way to provide diversification for your portfolio.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time he owned none of the companies mentioned, but his clients own Telecom New Zealand.
