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Investing in Top Telecommunications Stocks

Updated: Oct. 27, 2021, 10:21 a.m.

Telecom companies provide the technology that links our increasingly connected world. Companies in this sector offer phone, internet, and television services and the infrastructure to support them.

The telecommunications sector is often attractive to relatively conservative investors seeking dividend income, but plenty of telecom companies are also growing significantly.

Let's take a closer look at some top telecommunications companies and consider what to prioritize when choosing telecom stocks for your portfolio.

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The telecom industry is rapidly changing in the current economic climate. Find the latest information in the newsfeed at the end of this article.

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Best telecom stocks

These three companies stand out as telecom industry leaders:

1. Verizon Communications

Verizon Communications (NYSE:VZ) is the largest wireless carrier in the U.S. That scale produces excellent free cash flow and superior gross margins. Verizon’s cash flow consistently exceeds its dividend payment, which enables the company to maintain an attractive dividend yield. And, with the recurring nature of its revenue, Verizon is unlikely to see a significant drop in cash flow anytime soon.

Verizon’s management has also maintained its debt at manageable levels, unlike many competitors that have relied on leverage to fund acquisitions. The company has a wireline business, but it has been divesting its assets over the past several years.

2. Comcast

Comcast (NASDAQ:CMCSA) is the largest pay-TV and home internet service provider in the U.S. While it also owns NBCUniversal, a giant in the media industry, Comcast’s biggest source of revenue and profits is its cable communications business.

Comcast stands out for bringing in hundreds of thousands of new internet subscribers every year. Earning relatively high margins from internet customers has enabled the company to offset its video subscriber losses while still increasing its operating income at a strong rate.

Comcast also owns Sky, a dominant pay-TV operator throughout Europe that the company acquired in 2018. Comcast’s NBCUniversal is well positioned to support the continued expansion of Sky on the continent, and Sky enables NBCUniversal to follow through on its plan to launch a direct-to-consumer streaming service in Europe.

Comcast paid a high price for Sky, which added a lot of debt to the company’s balance sheet. But the telecom giant's strong free cash flow and improving margins make it likely that Comcast can reduce its debt to more attractive levels.

A worker standing at the bottom of a telecom tower.

Source: Getty Images

3. American Tower

American Tower (NYSE:AMT) operates more cell towers in the U.S. than any other company. Additionally, it’s well diversified internationally, with towers in fast-growing markets such as India, Brazil, and Mexico.

American Tower’s large number of locations puts the company in a good position to profit from the increasing demand for mobile data. Wireless carriers are building out their 5G networks, requiring new tower sites and equipment. American Tower's infrastructure is best suited for installing 5G networks in suburban and rural areas with fewer people.

As a real estate investment trust (REIT), American Tower pays out at least 90% of its taxable income to shareholders every quarter. With a strong position in the growing U.S. market, sites in many developing markets, high switching costs for its tenants, and contractual annual rate increases, American Tower's net income and dividend are both likely to keep rising.

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Trends in the telecom industry

The major trends driving growth in the telecom industry are the need for faster internet and the increasing number of internet-connected devices. Wireless carriers in the U.S. and around the world are working to build out their 5G networks as quickly as possible in order to support demand from both consumers and enterprises.

Denser communications networks are also becoming necessary, driven by the growth of the Internet of Things, smart cities, and people working from home. Consumer devices such as smartphones, wearables, and smart speakers are proliferating and increasing the need for networks to support many connections at once. The rise of edge computing is also boosting the need for denser communications networks.

Picking the best telecom stocks

Any top telecom company is well positioned to profit from the prevailing trends in the sector. The best telecom stocks also tend to share these characteristics:

  • Economies of scale: A large scale of operations can confer major advantage in the telecom industry. High fixed costs make it necessary to capture a large subscriber base, and enjoying economies of scale relative to competitors can produce attractive gross margins and free cash flows.
  • Sustainable competitive advantages: Telecom companies with strategic holdings, like radio spectrum licenses, land rights, or unique intellectual property, are uniquely well positioned to compete. Strong branding and high switching costs are other types of relevant competitive advantages.
  • Healthy balance sheet: While telecom companies' recurring revenues enable them to assume substantial debt, the best telecom companies avoid high debt levels. Companies with healthy balance sheets have reasonable debt-to-equity ratios and ratios of debt as percentages of invested capital.
  • Strong free cash flow: Although telecom companies produce lots of recurring revenue, maintaining a communications network is extremely expensive. Companies with strong free cash flows have enough cash remaining each quarter to support necessary infrastructure investments in addition to maintaining or growing a regular dividend.
  • Growth potential: The best telecom companies have specific and realistic plans to capitalize on the trends driving the impressive growth in the telecom industry rather than simply relying on industry tailwinds to grow.

The best telecommunications companies are generally already market leaders. Any dominant telecom company that continues to leverage its competitive advantages while maintaining good fiscal discipline is likely to continue to reward investors -- whether via stock price appreciation, dividend increases, or both.

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