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Buy These 5 Telcos to Cushion Your Portfolio Against Market Turmoil

Zacks

After an exponential rise throughout 2017, the U.S. stock markets have been witnessing turmoil in the last couple of weeks. There is widespread panic in Wall Street, with all the major indices officially entering the correction territory that has extinguished the nearly nine-year bull run. As of now, there is no clear cut opinion about recent market volatility (whether this is only a healthy correction or the beginning of what could become a full-fledged bear market).

Whatever be the reason, investors should be prepared to minimize fluctuations in their portfolio and consequently should rebalance it with suitable financial assets to maintain stability. At this juncture, we believe telecom stocks may become important instruments for portfolio stabilization.

Why Telecom Stocks?

The need to remain connected is a human need. An era of digitization and technology is essentially built on this human need. It is here that telecommunications come to the fore as a necessary utility. The need for telecommunications in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. Telecom is one of the few industries to have seen rapid technological improvement even during recession.

A growing economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. This in turn has given a boost to the demand for telecom infrastructure developers, particularly wireless equipment manufacturers.

Major Positives

Several positives emerged for the telecom industry since the last quarter of 2017. President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.

Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as President. We believe that the telecom industry will be one of the major beneficiaries of this policy change.

On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (FCC) repealed the Net Neutrality laws that it had imposed under the Obama regime. There is little doubt that the ISP industry will be the major beneficiary after FCC dismantling Net Neutrality. The current FCC's less-restrictive regulatory attitude may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.

The proposal to reduce corporate tax rate from 35% to 21% faced by telecom carriers would be immediately accretive to cash flow. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and deployment.

The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years along with the above-mentioned policy changes are likely to spur higher consumer spending.

Upcoming 5G Wireless Network

5G (Fifth-generation) superfast wireless networks will provide the primary impetus to the telecom industry. In 2018, we expect 5G wireless network to be a game changer in the telecom space with a full-fledged deployment in 2020. Per a report by research firm iGR, U.S. telecom operators will spend around $104 billion between 2015 and 2025 to upgrade existing 4G networks to the upcoming 5G standards and thereafter, execute full installation of 5G wireless services.

We expect wireless networks to provide the primary impetus to the telecom industry. In this regard, Internet of Things (IoT) has the potential to emerge the numero uno factor for future growth in the space. According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT will grow at 19.2% compound annual growth rate to nearly $1.7 trillion in 2020 from $698.6 billion in 2015.

High Dividend Yields

One of the easiest ways for any company to raise its shareholders’ wealth is to hike dividend rate. Telecom companies offer one of the highest dividend yields in the U.S. economy.

Typically, well established, profitable companies pay dividends. Investors seeking income-producing (dividends) stocks are well served by growth and income-oriented companies, i.e., companies with stable earnings growth that pay a solid dividend.

Unlike other industries, U.S. telecom operators generate revenues predominantly in the country. This makes these stocks less susceptible to volatility in the foreign exchange rate as well as macro-economic fluctuations plaguing the rest of the world.

As the U.S. economy is growing steadily supported by strong data of various macro-indicators, many of these large companies are likely to generate massive cash but because of their size, may not have growth opportunities they once had. For that reason high dividend-yielding companies will be attractive for investors.

Our Pick

As a predominantly defensive industry, we believe telecom stocks will be beneficiaries when the market is in doldrums. Significant tax relief together with the strong underlying policy of ensuring that Americans have access to high-speed mobile broadband in rural and urban areas alike, should help large telecom operators going forward. Substantial government expenditures, including those on U.S. broadband infrastructure development program and similar structural subsidies in China and India, have been a boon to telecom service providers.

At this stage, we believe investors should choose stocks which promise strong near-term growth, solid dividend yield and carry a favourable Zacks Rank. Taking into account these factors, we present five such stocks for investors to consider. Each of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Verizon Communications Inc. VZ: Headquartered in New York, the company is one of the leading communication technology companies globally. Further, it is the largest U.S. telecom operator offering all kinds of wireless and wireline services. Verizon has a long-term (three-five years) EPS (earnings per share) growth estimate of 5.41% and a dividend yield of 4.73%.

Telecom Argentina S.A. TEO: Headquartered in Buenos Aires, the company holds a license to provide basic telephone service and fixes telecommunications links in the northern region of Argentina. Telecom Argentina has a long-term (three-five years) EPS growth estimate of 12.84% and a dividend yield of 3.42%.

Mobile TeleSystems OJSC MBT: Headquartered in Moscow, the company provides telecommunication services in Russia, Ukraine, Turkmenistan and Armenia. It offers voice and data transmission, Internet access, pay TV, and various value added services through wireless and fixed lines. It also sells equipment, accessories and handsets. It has a long-term (three-five years) EPS growth estimate of 10.72% and a dividend yield of 6.27%.

TIM Participacoes S.A. TSU: Headquartered in Rio de Janeiro, the company is the sole company in Brazil to offer mobile cellular service nationwide through its subsidiaries TIM Celular S.A. and TIM Nordeste S.A. The company is the largest GSM (Global System for Mobile communications) operator of Brazil, in terms of clients and revenues. It has a long-term (three-five years) EPS growth estimate of 23.50% and a dividend yield of 0.75%.

Turkcell Iletisim Hizmetleri A.S. TKC: Headquartered in Istanbul, the company is the largest provider of mobile communications services in Turkey. It has a dividend yield of 7.91%.

Chart Looks Attractive

The chart below shows all five stocks witnessed positive movement in share price in the last three months.



Bottom Line

The U.S. stock market is going through turmoil. This phase is likely to continue in the near-term. At this stage, we believe that these five stocks with a favourable Zacks Rank, high dividend yield and significant growth potential are poised to capitalize on growing opportunities.

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