Thanks to the dramatic rise of benchmark indices against seemingly outrageous headwinds, putting money to work with telecom stocks might seem overly cautious. Although the technology undergirding the sector is exciting, the investment narrative itself lacks pizzazz. Therefore, many investors are choosing to fly high with growth names, although contrarian investors may still want to consider this vital infrastructure arena.
First and foremost, popular growth plays aren’t guaranteed to keep pinging profits for your portfolio. While the recovery from the initial onslaught of the novel coronavirus has been a remarkable one, it’s fair to have some skepticism. For instance, the wealth gap has widened considerably since the pandemic, which means there’s less monetary resources to support broad-based growth. That’s not great for cyclical investments but might be a cynical catalyst for telecom stocks.
Second, the telecommunications industry may be boring but this lack of excitement implies stability. And stable firms pay dividends. Not only that, telecom stocks have garnered a reputation for sizable passive income opportunities. With growth names, on the other hand, their bullish thesis relies almost strictly on capital gains — and there’s zero predictability about whether they succeed or fail. With telecoms, you at least have reasonable assurances of consistent financial benefits.
Third, while some evidence points to rising interest rates — which in turn may cause increased investment competition for telecom stocks — that’s not necessarily a guarantee. Yes, precious metals fell sharply over fears that the Federal Reserve will move to control inflation. However, you’ve got to also consider consumer debt service repayments. They’re at rock-bottom lows because of government intervention. Take the punch bowl away suddenly and you may have a crisis on your hands.
Finally, you have the main reason to consider the telecom sector: the 5G rollout. With every area of technology a constant battle for supremacy with our international rivals, this market will enjoy significant government investment. Therefore, you’re betting on an incredibly relevant segment with these telecom stocks.
- Verizon Communications (NYSE:VZ)
- AT&T (NYSE:T)
- BCE (NYSE:BCE)
- American Tower (NYSE:AMT)
- America Movil (NYSE:AMOV)
- Vodafone (NASDAQ:VOD)
- Orange (NYSE:ORAN)
Although there’s no such thing as a risk-free investment, telecom stocks offer a key and perhaps permanent catalyst: they’re indelible to upward mobility. While you can live without certain products and services, telecom in this day and age is an absolute necessity.
Telecom Stocks to Buy: Verizon Communications (VZ)
As the largest wireless carrier in the U.S., Verizon Communications will usually find its way near the top of any discussions about telecom stocks. Operationally, management runs the company like a well-oiled machine, with free cash flow consistently strong year after year. This metric enables Verizon to offer its stakeholders a healthy dividend yield, which on a last-12-month (LTM) basis stands at 4.55%.
Further, the telecom giant has weathered the Covid-19 storm quite well. In 2020, it generated revenue of $128.3 billion, which was down less than 3%. Considering the devastation of the public health crisis, that’s a win in plenty of people’s books. Moreover, in its second quarter of 2021 earnings report, Verizon rang up $33.8 billion in sales, up sequentially (from Q1 2021) 3% and up against the year-ago quarter by 11%.
Moving forward, Verizon has exciting plans, with the company expanding its 5G offerings for home and wireless markets in regions like Austin, Texas and Gresham, Oregon. As you know, both the Lone Star State and the Beaver State is popular with millennials, affording VZ added relevance compared to other telecom stocks.
It’s not easy being an AT&T shareholder and I would know personally because I am one, for full disclosure’s sake. But we certainly got another reality check — as if we needed it — when the company backtracked on its position regarding its very generous dividend. In an unpopular move, management announced that it will cut the payout be nearly 50%.
That’s quite a number. It also stinks to high heaven because, months prior to the announcement, at AT&T’s investor day, the company’s leadership team is committed to keeping the dividend as is. Naturally, Wall Street wasn’t happy with the turncoat move and pounded T stock harshly.
Still, trying to be as objective as possible, AT&T might be one of the more intriguing long-term turnaround plays among telecom stocks. First, by slashing the dividend as part of the process in selling WarnerMedia to Discovery (NASDAQ:DISCK), it gives AT&T financial flexibility. Second, the workaround allows the company to focus on its main business, 5G and broadband.
Sure, it’s hard to trust a company that goes back on its word. However, its new route is arguably more viable and half of AT&T’s LTM dividend of 7.5% is still a sizable number.
Telecom Stocks to Buy: BCE (BCE)
For those seeking a mixture of decent capital gains opportunity with a very generous yield in their telecom stocks, look no further than BCE. As Canada’s largest telecommunications firm, BCE levers considerable influence. Reported in late 2019, Bell Media, BCE’s mass-media subsidiary, inked a long-term exclusive deal with Warner Bros. International Television Distribution.
While the entertainment content space has several streaming competitors, HBO has an enviable track record for crafting material that millions desire. Also, BCE commands sports station TSN, which should prove popular thanks to a combination of the return of professional sports and pent-up demand from consumers having to go without for so long.
Remarkably, BCE substantially mitigated damage caused by the Covid-19 pandemic, with its 2020 revenue of $17.9 billion down by a little more than 1% from 2019’s haul of $18.1 billion. More importantly, the company’s Q2 2021 result of $4.7 billion was up sequentially 3% while gaining a hearty 18% over the year-ago level.
Finally, with a forward annualized yield of 5.7%, BCE proves that the Great White North holds its own regarding telecom stocks.
American Tower (AMT)
When it comes to innovations like 5G, many folks naturally tend to focus on the underlying technology. However, 5G and any other technical development in telecom stocks also represent an infrastructure play. After all, without a robust network of cell towers, you’re not going to get much traction in this sector.
That’s why if you are a big fan of telecom stocks, you should also look into companies like American Tower. A real estate investment trust (REIT), AMT stock provides long-term investors with an enticing setup. Per the Securities and Exchange Commission guidelines, a REIT must, among other qualifications, distribute at least 90% of its taxable income to shareholders annually.
To be clear, this doesn’t necessarily mean you’ll get a massive dividend — or even a dividend at all — because dividend distributions for REITs are based on cash flow, not earnings. However, investors can more readily bank on American Tower due to its extraordinarily relevant business.
In a way, AMT is the utility play for telecom stocks. Bad things happen when people try to place a call and it doesn’t go through. American Tower is in the business to make sure that doesn’t happen.
Telecom Stocks to Buy: America Movil (AMOV)
While emerging markets carry significant risks, they also provide robust upside opportunities. For telecom stocks, you need not look further than America Movil. Operating primarily in Central and South America — including the valuable regions Mexico, Brazil and Colombia — America Movil is well positioned to scale up its business once we’re done with the coronavirus pandemic.
Even with the global crisis, the telecom firm has performed admirably. In 2020, the company generated revenue of $50.9 billion, which was only down 3.4% from 2019’s sales haul of $52.7 billion. Better yet, America Movil has sparked momentum this year, with its Q1 2021 sales performance of $12.6 billion. This tally represented an increase of 5.4% sequentially and nearly 12% up against the year-ago quarter.
Thus, the nearer-term picture for AMOV is encouraging once the pandemic fades. But the equity unit is particularly enticing for patient investors. Thanks to a favorable population pyramid in Latin America and the Caribbean — that is, there are more younger people than there are older — AMOV can bank on demographic trends that may be unavailable for other telecom stocks.
If you want to add a little more risk to your portfolio of telecom stocks, you should consider Vodafone. One of the top dogs in the telecom space in Europe — it serves the lucrative markets of Germany and the U.K., among others — Vodafone nevertheless is working through a transitional phase.
Unfortunately, its deals haven’t exactly panned out well for VOD stock. For example, over the trailing five years, shares are down nearly 46%. Over the trailing year, VOD is up only 8%, which is disappointing considering that other telecom stocks benefitted from a comparison against a pandemic-fueled low point. As well, on a year-to-date basis, Vodafone has basically broken even.
Still, the company’s financial performance provides much encouragement. In its fiscal year 2021 (ended March 31), Vodafone generated over $52 billion in revenue, which was up 5% and 5.7% against fiscal 2020 and 2019 results, respectively. Also, its $26.6 billion sales haul from the quarter ended March 31, 2021 was up 8% against the year-ago level.
Finally, Vodafone’s LTM yield of 6.41% is quite generous. If you believe in the European comeback, VOD stock is your ticket.
Telecom Stocks to Buy: Orange (ORAN)
Another play among European telecom stocks, Orange represents the sector leader in France. To be upfront, Vodafone is pressuring Orange in their highly competitive market, particularly in Spain, where Vodafone leverages significant influence. Following a price hike, many Spanish customers balked — not surprising considering the global impact of the coronavirus pandemic.
Nevertheless, Orange remains dedicated to the heavily contested market, with Orange’s CEO recently declaring a commitment of nearly 4 billion euros ($4.75 billion) for its Spanish unit. If you believe in Orange as much as the chief executive does, then ORAN might have something for you.
However, I’m personally much more interested in its other sectors, Africa and the Middle East. If you look at a population pyramid for the African continent, it’s exactly that — a pyramid. Proportionally, older people in Africa make up only a small segment of the population. With a young, vibrant and energetic labor force, Orange’s investments in the region can pay off handsomely for years to come.
As well, the Middle East has exploded in economic relevance, moving well beyond energy-related commodities. Orange’s wheeling and dealing should pay off there too, making ORAN a compelling idea.
On the date of publication, Josh Enomoto held a LONG position in T. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.