When it comes to picking telecom stocks, are investors nuts?
I ask this because they have been clearly
bullish
on U.S. telecom
Verizon (
VZ
)
, which offers a 5%
yield
yet only 4% year-over-year revenue growth, instead of telecom
stocks with higher yields and revenue growth. As a result, Verizon
has returned more than 10% during the past year and three-year
annual average gains of 16%.
Contrast this with Israeli telecom
Partner (Nasdaq: PTNR)
, for instance. Despite a hefty 8% yield and annual revenue growth
of more than 10%, Partner has underperformed its telecom peers and
the broader
market
.
At first glance, Partner's weak market performance makes no sense.
But, as I tell readers of my
High Yield Investing
advisory, telecoms are tricky to analyze.
Financial statements
don't tell the whole story. One-time events can swell revenue and
earnings
, yet growth may not be sustainable. The true test of sustainable
growth for a telecom lies in the mix of a three key industry
metrics:
• Subscriber growth
• Average revenue per user/unit (ARPU), which measures monthly
revenue per subscriber or device
• Churn rates, which measure the percentage of connections that are
lost each quarter.
Applying these three metrics, Partner's languishing share price and
Verizon's strong gains in the past few years are entirely
justified. Let me explain...
Although Partner has seen healthy double-digit revenue growth in
the past year, these gains were mostly driven by the March 2011
acquisition
of Israel-based telecom Smile 012. In addition, an increasingly
growing churn rate of 7.2% in the fourth quarter of 2011 indicates
the company is losing customers and
market share
to the competition.
Verizon's revenue, on the other hand, barely budged in the fourth
quarter of 2011. The company's domestic wireless connections grew
by 6% compared with the year-ago period, while the average revenue
per unit increased by 2.3%. Its churn rate of 1.2% actually
declined by 10% during the same period.
As it turns out, investors are quite sensible when it comes to
picking telecom stocks.
Keeping this tale of two telecoms in mind, I went looking for
attractive high-yield telecoms that sport sustainable growth.
First, I narrowed my choices to about 24 stocks that trade on the
Nasdaq or the New York Stock Exchange and carry a forward yield of
5% and up, based on
dividend
payout estimates.
I then searched for the telecoms with the best year-over-year
growth rates, the lowest churn rates as well as changes in
subscriber addition after losses and average revenue per user. For
all these measures, I focused on wireless services, as this segment
represents the main growth area for the majority of the telecoms in
this group.
Here are what I consider to be the best of the group...
It's important to keep in mind that a loss of high-margin,
post-paid (contract) subscribers raises more concerns than a loss
of less profitable wholesale connections provided to other
retailers or prepaid (pay-as-you-go) subscribers. In addition,
post-paid subscribers who use smartphones are bigger spenders on
data such as video downloads than users of standard cellphones.
For example, Verizon increased subscriber connections by 6% last
year. This growth came from an increase in the number of new
connections after net of losses compared with the previous year.
While new wholesale connections declined a whopping 53%, there was
a healthy 68% increase in more lucrative post-paid retail
subscribers under long-term contracts.
In contrast, Montreal-based Bell Canada, a subsidiary of
BCE (
BCE
)
, enjoyed a 3% increase in the total number of wireless subscribers
in 2011 compared with 2010. But the real story is that aggressive
pricing from competitors led to a 13% decline in net additions of
profitable post-paid customers. What saved the day for this telecom
is that 48% of its post-paid subscribers bought data-hungry
smartphones by the final quarter of the year, up from 31% in same
period of 2010.
Like Verizon, Bell reported year-over-year increases in average
revenue per user. They also enjoyed some of the lowest average
wireless churn rates among the group, with 1.2% for Verizon and
2.1% for Bell, during the fourth quarter of 2011.
Besides Verizon and Bell Canada, wireless provider
NTELOS (Nasdaq: NTLS)
posted a fairly strong performance. NTELOS had a 4% decline in its
subscriber base year-over-year, but average revenue per user held
relatively steadily, with less than a 1% decline. The company also
registered a steady and fairly low churn rate of 3.7% at the end of
the third quarter of 2011.
It's no coincidence these three high-yielding telecoms are also
among the market's top performers. Verizon's 6% and Bell's 8%
average annual returns during the past five years are far ahead of
the
benchmark
S&P 500, which has barely returned 1% in the same period.
Meanwhile, NTELOS
shares
have been going like gangbusters, returning an impressive 19% so
far this year, more than twice the benchmark
index
.
Risks to Consider:
The telecom industry is in a constant state of flux. A
company's metrics can change quickly from year to year, or even
from quarter to quarter, in response to changes in technology,
government regulations, competitive forces and acquisitions, among
other events. As such, this list should be treated simply as a
springboard for further research.
Action to Take -->
Of the three telecoms, Verizon's numbers look the best. In fact, I
own shares in my
High-Yield Investing
portfolio. But I've also have my eye on NTELOS and Bell Canada,
which are also worth researching further for their hefty yields and
sustainable growth.
-- Carla Pasternak
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of VZ in one or more if its "real money" portfolios.