By: Aditi Ganguly
Telecom companies enable our increasingly connected world.
At one time, they were considered growth stocks – similar to what we think of Internet stocks today. Now, they appeal to conservative investors seeking dividend payments.
In a way, they are a combination of utilities and technology companies. Like utilities, there is a significant amount of upfront cost and capital expenditures to maintain their infrastructure. But, they also have a wide moat and high levels of customer retention which gives them consistent revenue.
There’s also aspects of technology in that telecom companies have gone from providing phone service to high-speed Internet in a couple of decades. And, they need to constantly be investing in order to evolve with new technology and their customers’ needs. Right now, cell phone companies are furiously upgrading their equipment so they can be ready for 5G-enabled phones.
Even today, the network has to be fast enough to support streaming video, running apps, and transmitting large amounts of data. The major differentiator for telecom companies in the near future is the performance of their networks in a 5G world.
Here are two telecom stocks and a REIT that should outperform in the second half of 2020:
Verizon Communications Inc. (VZ)
This telecom giant is known for its financial stability and an attractive dividend. VZ has been able to sail through the pandemic with limited impact on its business model thanks to its long-term service contracts.
VZ’s first quarter EPS increased 5% year over year to $1.26 per share, which beat the consensus estimate by 3.3%. Revenue for the wireless carrier fell 1.6% year over year to $31.6 billion.
VZ lost 84,000 Fios TV subscribers and 68,000 postpaid mobile phone subscribers during the first quarter. The increase in streaming is primarily responsible for the decline in Fios TV subscribers. However, in order to increase customer loyalty, VZ is waiving late fees and not terminating service for customers during the pandemic.
VZ continues to build its 5G wireless services and fiber-optic backhaul networks to ride this boom. In fact, The UK government’s recent ban on Huawei equipment in 5G wireless networks, and the Trump administration’s placement of Huawei and Hikvision on a trade blacklist last year bode well for VZ’s 5G move.
Moreover, India’s Bharti Airtel recently partnered with VZ to launch a video conferencing service. Branded as Airtel BlueJeans, it will serve business customers in India. Since India is the world’s second largest internet market, VZ should significantly benefit from this partnership.
In addition to the stock’s growth potential, the dividend is a major attraction. VZ pays an annual dividend of $2.46, which yields 4.44%.
VZ hit its 52-week low of $48.84 on March 25th due to the virus-led market crash, but the stock has recovered more than 10% since then.
How does VZ stack up in the StockNews.com POWR Ratings?
B for Buy & Hold Grade
B for Peer Grade
B for Industry Rank
B for overall POWR rating
The stock is also ranked #3 out of 24 stocks in the Telecom – Domestic industry.
T-Mobile US, Inc. (TMUS)
TMUS is another stock every investor is familiar with. It is one of the prime contenders in the 5G race, especially after its merger with Sprint Corporation.
TMUS CEO Mike Sievert plans to invest $40 billion in infrastructure and supporting services to establish 5G in every nook and corner of the country. The company anticipates the synergies achieved from the integration to create at least $43 billion in value for shareholders.
The combined company plans to provide 5G service to 99% of the US population within six years. So, one could reasonably expect this move to substantially increase revenues.
TMUS has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters. Moreover, the consensus revenue estimate for the quarter ended June 2020 indicates a year-over-year increase of 58.5%. TMUS gained more than 40% since hitting its 52-week low of $63.50 on March 18th.
It’s no surprise that TMUS is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank. In the 24-stock Telecom-Domestic industry, it is ranked #1.
American Tower Corporation (REIT) (AMT)
AMT is one of the best performing REITs during the pandemic as it’s gained nearly 45% since hitting its 52-week low of $174.32 on March 23rd. The quick upswing can be attributed to surging demand for data centers across the country especially with corporates and individuals moving to digital platforms.
AMT also plays a vital role in the upcoming 5G network, as new infrastructure is required to facilitate high speed internet all across the country. Hence, AMT’s revenues are expected to rise in the future.
While AMT missed the consensus EPS estimate in the last reported quarter, it beat the estimates in the prior three quarters. Also, analysts look pretty optimistic ahead of AMT’s second quarter earnings release with the consensus EPS estimate of $1.04 indicating a year-over-year increase of 8.3%. The consensus revenue estimate of $1.94 billion also indicates a year-over-year increase of 2.8%.
AMT has a dividend yield of 1.7%. The company has been consistently increasing dividends since 2012 and should be able to continue doing so given its increasing cash flow. AMT’s free cash flow has increased for 11 quarters.
AMT is rated a “Strong Buy” in our POWR Ratings system, consistent with the strength in its financials. It also has an “A” for Trade Grade, Buy & Hold Grade and Peer Rank. It is ranked #1 out of 50 stocks in the REITs- Diversified industry.