Telecom is one of the biggest industries in the world at this point. That, however, doesn’t mean all telecoms offer the same promise of growth and success. Likewise, there may be a mobility megatrend in play, but that doesn’t mean it’s going to raise all boats. Some will sink. Welcome to the boat graveyard.
Many companies outside the U.S. are having a difficult time transitioning from landlines to wireless. Some can’t afford to do the transition well without charging users absurd prices. Some economies aren’t vibrant enough to support competition.
For U.S. companies, it’s not only a financial challenge for big firms to keep up with the latest tech for their customers. They are also battling for market share with smaller competitors that now offer a very similar product for lower prices.
The red flag they all have in common is, they provide tantalizing dividend yields. But don’t take the bait! These seven telecom stocks are high-yield money traps.
High-Yield Telecom Money Traps: PLDT (PHI)
Dividend Yield: 8%
PLDT Inc (ADR) (NYSE:PHI) is the former Philippine Long Distance Telephone Company, that changed its name last year as a rebrand to a more modern take on the firm. But it’s old wine in a new bottle. There’s nothing new about the business.
PHI’s greatest challenge is its greatest opportunity — a large population. The problem is, the population, aside from a few mega-cities, is spread around 7,000-plus islands. And since most of the citizenry is not wealthy, it’s difficult to keep a business profitable.
Also remember, the Philippines are a Western ally in the heart of the Pacific Rim. U.S. firms have call centers and other service jobs there since they’re predominantly English speakers, but the pay is very low. That means it’s a challenge for a firm like PHI to grow margins, expand and upgrade services, etc.
It may be sporting an 8% dividend yield, but the environmental, political and economic challenges don’t augur well for the stock. What’s 8% if the stock is off nearly 30% in the past six months?
High-Yield Telecom Money Traps: Vodafone (VOD)
Dividend Yield: 6%
Vodafone Group Plc (ADR) (NASDAQ:VOD) says on its website it’s a global IT and communications company that is helping transition its business and individual customers for the “Gigabit Society,” whatever that is.
You may remember VOD from a few years back when it sold its 45% interest in Verizon Wireless back to Verizon Communications Inc (NYSE:VZ) for around $130 billion. It took the money and expanded operations across Europe, Middle East, Asia Pacific and Africa. VOD even serves the U.S. enterprise business market as a wireless services company.
The problem is, U.S. operations are limited because of its deal with VZ, so it doesn’t really offer much growth. The other markets it’s in are mired in the economic downturn. Also, some of its more far-flung markets are expensive to operate in, which is another burden on margins and revenue.
VOD is off almost 20% in the past six months, so its 6% dividend isn’t very helpful.
High-Yield Telecom Money Traps: Centurylink (CTL)
Dividend Yield: 9%
Centurylink Inc (NYSE:CTL) calls itself an integrated communications company. That simply means it’s selling everything it can to whoever wants to buy it.
It is in what’s becoming one of the toughest markets for second tier telecoms in the U.S. Cable providers are moving in on the internet space and wireless is eating into its wireline business. That leaves a manageable service base that is predominantly rural or in smaller towns and cities. However, that market doesn’t hold much growth. We can see these problems unfolding in CTL’s margins, which are shrinking. It missed on earnings in its most recent quarterly report in early February.
Layoffs will mean big write-offs in the next quarter and it will still have to successfully manage the acquisition of Level 3 Communications Inc (NASDAQ:LVLT), a well-positioned network firm.
Off 15% in the past six months, its 9% dividend still doesn’t get you back to breakeven. More downside risk than upside potential here.
High-Yield Telecom Money Traps: BT Group (BT)
Dividend Yield: 4.6%
BT Group plc (ADR) (NYSE:BT) was the former British Telecom, the world’s first telecom firm, founded in 1846 as a telegraph company.
In the old days there were inherent advantages to being a British firm, since it meant opportunities to expand into its network of “colonies” that spanned the globe. Today, BT serves Asia, Europe, the Middle East and Africa as well as the Americas.
Things were good at BT while the British Empire wound down. But now the firm is challenged by a world of competitors. And things like Brexit make BT’s position a little more difficult to value.
The market hates uncertainty and BT’s relationship with the European Union is certainly uncertain. Also, last year there was an accounting scandal at BT Italia, where losses that were expected to be in the $150 million range came in closer to $500 million. More uncertainty. This helps explain why the stock is off 40% in the past 12 months. Its sub-5% dividend makes BT no more attractive right now.
High-Yield Telecom Money Traps: Frontier Communications (FTR)
Dividend Yield: 14.6%
Frontier Communications Corp (NASDAQ:FTR) is in a niche business during this second wave telecom revolution. It focuses on providing wireline services — landline phones, internet, voice and data systems, etc. — to individuals and businesses that are outside major metropolitan areas.
One or two decades ago, this was a pretty good business. Big telecoms like Verizon were looking to shed less profitable wireline operations in sparsely populated regions as it expanded its mobile service areas. Nowadays, FTR has operations in 29 states. The problem is, it’s selling buggy whips in a market transitioning to horseless carriages. And that came home once again in its recent earnings report — the losses were wider than even the company expected. Sadly this is more the rule than the exception at this point for FTR.
On the bright side, it’s throwing off a massive dividend that is close to 15%. But just bear in mind that the stock is down 50% in the past 12 months. Subtracting out that massive dividend still leaves you 35% in the hole.
High-Yield Telecom Money Traps: Verizon (VZ)
Dividend Yield: 4.6%
Verizon is the largest wireless carrier in the U.S. But that only makes it harder to keep what it has. As you have seen and heard in the scores of mobile commercials on TV and the radio, this market has some significant competitors these days.
If you’re the No. 3 or No. 4 carrier, you have a much better chance to grow your margins, base and earnings than if you’re No. 1. Those smaller carriers are going after your business. Add to this growing competition in your core business, a couple massive acquisitions — AOL and Yahoo! — to expand into the content and content provider space. This buying also increases an already sizable amount of debt on the books.
And you can already see the challenges that come along with digesting new acquisitions. Yahoo’s most recent hack has sent both sides back to the negotiating table to figure out how to value the property now. VZ will make it out of this tailspin, but its 4.6% dividend barely gets the stock in the black in the past 12 months. And its recent earnings surprise (to the downside) means there’s no reason to catch this falling knife.
High-Yield Telecom Money Traps: Consolidated Communications (CNSL)
Dividend Yield: 7%
Consolidated Communications Holdings Inc (NASDAQ:CNSL) traces its roots back 122 years. By the early 20th century, CNSL has bought up a number of small phone companies in Illinois to form the Illinois Consolidated Telephone Company. In 1984 CNSL was formed as a holding company all the assets the company had.
Since then it has bought telecom and cable operations in California, Illinois, Iowa, Kansas, Minnesota, Missouri, North Dakota, Pennsylvania, South Dakota, Texas and Wisconsin.
The trouble is, its services are under a great deal of pressure from the new mobile world. Cable television is losing ground to streaming. The phone and data service business is under intense pressure from all manner of competitors. CNSL is finding it challenging not to become a vestigial business that doesn’t have a compelling focus or growth track. And this is showing up in its earnings. For Q4 as well as the fiscal year, revenue, earnings and net income were down on a year over year basis.
Add to that a $1.5 billion merger with FairPoint Communications Inc (NASDAQ:FRP), which has added $935 million in debt to the ledger. Yes, it delivers a 7% dividend. But it’s off 17% year to date and trades at a staggering P/E of 77. None of these sevens are lucky numbers.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.