Risks and Opportunities for Long-Term Dividend Investors in Global Telecoms
Published Mon, 08 Apr 2013 09:30 CET by DividendYields.orgDefensive consumer staples and healthcare stocks have been the primary drivers of the U.S. market’s rally so far this year. These sectors generally consist of non-cyclical companies that are known as consistent dividend payers over the long-term. Also faring well have been the two U.S. telecom giants, AT&T (NYSE: T) and Verizon Communications (NYSE: VZ), which have traditionally paid the highest dividend yields among the Dow Jones Industrial Average (DJIA) constituents. However, around the world, except most notably in Canada, the telecom sector operators, traditional cash cows and defensive dividend payers, have performed quite poorly. The worst hit are European telecoms, which, overburdened by excessive debt in a recessionary market environment, have been forced to cut or suspend their payouts. Despite declining prices and elevated yields, these telecoms have not appealed to dividend investors, as the threat of additional dividend cuts continues to loom. In other parts of the world, the environment remains challenging for telecom operators; however, some telecom dividend-payers may look attractive from a total return perspective or may boast a long-term income potential.
Focusing specifically on ADRs with consistent dividend growth, long-term dividend investors should weigh the various risks and opportunities of long-term investing for income in the global (non-U.S.) dividend-paying telecoms. The Nasdaq International Dividend Achievers Index is a good starting point, as it includes the ADRs of telecom companies that have increased their regular, annual dividends for the last five or more consecutive years. The list below summarizes the main characteristics of seven global telecoms that have continued to raise their dividends despite the global market’s adversity over the past several years.
In recent years, Vodafone Group (NYSE: VOD) (LSE: VOD) investors benefited from substantial dividend windfalls derived from its U.S. joint venture in Verizon Wireless with Verizon Communications. The JV-based dividend enabled the largest dividend payer in the UK to pay both higher regular dividends and special cash dividends over the past two years. Now, however, as the regular dividend has exceeded the free cash flow, Vodafone’s dividend policy appears to be unsustainable without relying excessively on cash from its 45% stake in Verizon Wireless. The situation is exacerbated by the recently implemented accounting changes that have resulted in downward-revised financials, including free cash flow, for the past two years. In line with the new accounting rules, Vodafone’s annual dividend commitment in 2013 will exceed the company’s free cash flow by 550 million Pounds, according to Nomura Securities’ projections. Moreover, the investment bank expects the radio spectrum costs to draw down Vodafone’s free cash flow in the near future. As a result, Nomura sees a 30% decline in Vodafone’s total dividend in fiscal year 2014. Still, there are speculations the UK telecom giant may divest its minority stake in Verizon Wireless –likely selling it to Verizon Communications for a speculated $115 billion– which could improve Vodafone’s cash position. Renowned hedge fund manager David Einhorn (from Greenlight Capital) believes Vodafone’s stock is undervalued on that basis.
Japanese telecoms sector plays, NTT DoCoMo (NYSE: DCM) (TYO: 9437) and Nippon Telegraph and Telephone (NYSE: NTT) (TYO: 9432), may not represent good investments for non-Japanese investors in the current environment in which the falling Yen is devaluing Yen-denominated assets and adversely affecting ADRs of Japanese companies. While the expected rebound in the Japanese economy from a reflationary monetary policy likely bodes well for the two companies, the continued prospect of a declining Yen risks offsetting those gains for foreign investors in these ADRs. Recent trends in stock prices support this assumption. The weakness in market performance is partly a reflection of these two telecoms struggling with declining subscriber counts and profitability in the near term. Otherwise, they are attractive based on valuation and yield. Nippon Telegraph and Telephone Corporation, which owns 63% of NTT DoCoMo and has 66% of its voting rights, also has a relatively high leverage.
On the other hand, the Canadian telecoms have produced exceptional total returns over the past year, as the table above shows. Rogers Communications (NYSE: RCI) (TSE: RCI.B) is Canada’s largest wireless operator by subscriber count, while TELUS (NYSE: TU) (TSO: T) is the nation’s third largest. These stocks have enjoyed comfortable positions in their industry. They also stand to benefit from the growing mobile data demand and the adoption of latest smartphones. However, both RCI and TU are now facing increasing competitive pressures from wireless peers and those expanding their service offerings in the cable and IPTV markets. Both stocks are trading at elevated valuations relative to historical metrics and those of their peers, with RCI priced at 14.7x forward earnings and TU valued at 16.8x forward earnings. RCI has a price-to-book of 7.2 versus its five-year average of 5.2, while TU’s price-to-book is also heightened at 2.9, compared with the stock’s five-year average of 2.0. Still, a continued expansion in both companies’ EPS should continue to support dividend increases in the future, in particular with regard to RCI.
China Mobile (NYSE: CHL)(HKG: 0941) is the world’s largest mobile phone operator by subscriber count. The company offers attractive value and income prospects, but, despite its large customer base, has only seen slow EPS growth. Last year, amidst a fierce competition, CHL grew its top line by 6.1% and its earnings by 2.7% year-over-year. One of its long-lauded deficiencies is the running of a home-grown 3-G technology, which does not support Apple’s smartphones. This is where its smaller competitors currently have the edge over the Chinese telecom giant. However, the company is investing $6.7 billion to roll out 4-G TD-LTE platforms in several cities –expected to expand to 100 cities by year’s end– which would support Apple’s iPhones. This should help CHL unlock its future growth potential. In fact, IHS iSuppli forecasts that “the number of China Mobile 4G subscribers will reach 228.8 million in 2017, representing 52% of China’s 439.9 million total 4G users”. Given the sanguine outlook for economic and per-capita income growth in China in the longer run, the outlook for this company looks rosy, particularly on higher adoption of smartphones and a rising mobile data demand. Still, it remains to be seen whether the 4-G integration will stem the company’s market share erosion in the near term.
Finally, America Movil (NYSE: AMX)(MX: AMXL), the leading telecom operator in Latin America, has experienced a number of negative developments over the past few years. One of the major adverse trends is Mexico’s legislative push to boost competition in its telecom sector, which bodes poorly for AMX. The company is expected to see its market share shrink in the future and margins plummet, leading to reduced earnings in the years ahead. The poor quarterly performance and the government’s regulatory action to increase competition in its telecom and television sectors has recently prompted the company to initiate large share buybacks. While this will provide some support to AMX stock prices, it takes away cash from alternative uses, such as expansion and dividend growth. While some analysts hold that the correction in AMX’s stock prices over the past year relative to the overall market’s creates a potential risk-reward opportunity, the stock still looks risky for dividend-oriented investors.
Overall, the global telecom sector, generally known for its defensive nature and attractive dividend yield, generally continues to operate in a challenging environment. Opportunities for growth exist in several markets, most notably in North America – however, those opportunities should be weighed against the individual stock’s valuation risks. The two Japanese telecom ADRs, which have faced some competitive challenges in the near term, carry a notable exchange-rate risk for foreign investors. Further, the largest Chinese telecom boasts a large potential and its dividend looks attractive at the current level. On the other hand, America Movil appears to carry a substantial risk for a prudent income investor considering the stock’s total return potential.
|Stock name||Dividend Yield|
|China Mobile Ltd||4.15|
|America Movil Sab De Cv||2.63|