Telecommunication sector stocks offer a unique blend of characteristics that are typical of utilities and technology companies. These companies require substantial capital expenditure to build network infrastructure and reserve portions of the radio spectrum. But these acquired assets help them establish wide moats and enjoy relatively secure recurring revenues from internet, mobile, and television customers. As a result, most major telecoms have relatively high financial leverage in their capital structures.
At the same time, telecommunications are subject to more rapid changes in the market compared to energy or water utilities. The rise of cable television, the internet explosion, the rapid adoption of mobile products, cord-cutting, and the upcoming rollout of 5G are notable instances of transformative periods in telecommunications, all of which can create rapid growth or deterioration of business fundamentals.
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When assessing telecommunication stocks, it is therefore important to identify companies with healthy balance sheets and stable growth outlooks, that have the financial means and a demonstrated intention to invest in the upcoming 5G transition. Such companies should have good long-term growth potential, with the proliferation of the Internet of Things (IoT) and ubiquitous connectivity. But these stocks should also be positioned to safely weather economic cycles and pay dividends to bolster portfolio returns when stock prices are volatile.
1. Bell Canadian is a strong leader in Canada
BCE (BCE -0.92%) is a Canadian telecoms company that provides telephone, mobile, and internet services, as well as television and radio content. Investors will be attracted to the stock's 5.02% dividend yield, and with its modest positive growth outlook for the medium term. Its EV/EBITDA ratio of 8.9 is very reasonable, indicating that holders are not overpaying for exposure to fundamentals. BCE's debt-to-equity ratio of 1.3 is also reasonable, albeit slightly higher than the telecom industry average. With a current ratio of 0.6 and interest coverage of 4.78, the company's financial health would only be seriously jeopardized by drastic market deterioration. BCE's free cash flow has steadily increased to $3.85 billion over the trailing 12 months, and it is in a great position to benefit from the rollout of 5G.
2. AT&T compares favorably to Verizon and provides great dividend income
AT&T (T -0.44%) is the world's largest telecommunications company, with large mobile and fixed telephone customers in North, Central, and South America. The stock pays a 5.2% dividend yield, which is conspicuously higher than the 4.03% delivered by competitor Verizon (VZ -0.10%). AT&T's 8.16 EV/EBITDA ratio is also cheaper than its primary rival's. AT&T's 1.02 debt-to-equity is substantially lower than Verizon's, indicating a lower level exposure to catastrophic risk if market fundamentals change drastically. The company's 3.4 interest coverage and 0.74 current ratios indicate sufficient short term financial health to meet obligations. AT&T is in position to lead the market in the next generation of telecoms while phasing out its legacy business.
3. Telus is an interesting smaller player
Telus (TU -1.10%) is a national provider of mobile, internet, television, fixed telephone, IPTV, and home security services in Canada. While smaller in scale than competitor BCE, the company still grades out favorably on several key metrics. A 4.64% dividend yield and an 8.45 EV/EBITDA ratio are both attractive at the current price of $37.61. Its financial health metrics are similar to BCE's though slightly skewed toward more risk. Telus has a 1.59 debt-to-equity ratio, 4.05 interest coverage ratio, and a 0.71 current ratio. These are all suitable if market conditions are stable to improving.
Time to add telecom to your portfolio
All three companies carry some risk related to high leverage, paired with massive capital expenditure requirements. As witnessed in previous shifts in telecommunication norms, the technology landscape can change rapidly, leaving poorly positioned incumbent companies in a terrible situation. If operating cash flows dry up for extended periods, there might be difficulty meeting the fixed financial obligations associated with servicing debts.
These three stocks all have stable outlooks and clear exposure to the opportunities of 5G, and they all pay excellent dividend yields. AT&T kicks off the highest dividend income among the group, with no discernible difference in upside exposure or financial health risk.
