Top Telecoms Still Cheap Compared to S&P 500: 4 Dividend Stocks to Buy

Print Email

Despite the outsized gains by the bond proxy sectors this year, which include telecoms, utilities and real estate investment trusts (REITs), one of those sectors still trades cheap to the S&P 500. While utilities trade at 17.3 times estimated 2016 earnings and REITs at 18.8, telecoms trade at a low 13.8 times, which is far below the S&P 500 at 16.6%. In addition, the telecoms have been hit by waves of profit-taking, which have knocked them down into a range that looks inviting.

In an interesting note, RBC makes the case that while the bond proxy stocks are definitely at a premium, as a group they trade in line with the S&P 500. While acknowledging that they may be more susceptible to rising rates, the firm also cites investor appetite for them when yields remain low, which they could for some time.

We screened for quality telecom stocks that pay solid and dependable dividends. These four look very attractive now.

AT&T

This stock has had an incredible run this year but is off over 10% in less than a month. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.

With its shares trading at a very cheap 14.3 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.

The company reported inline numbers for the second quarter, and while the consolidated revenue number was slightly higher than the Merrill Lynch estimate, the EBITDA was slightly below. Company management noted it is on track to meet or exceed current estimates for the year.

Many Wall Street analysts have cited the company’s positive commentary on free cash flow, in addition to improving video/broadband trends later this year, with single truck-roll and new converged offerings expected to be coming in October. The recent FCC initiative to open up the set-top business may be part of the reason the stock has been hit hard recently.

AT&T investors are paid a 4.8% dividend. The Wall Street consensus price objective is $42.84. Shares closed Tuesday at $39.97.

CenturyLink

This is the largest of the rural local exchange carriers (RLECs) and is expected to continue get a large dose of government money to provide continuing internet service in rural areas. CenturyLink Inc. (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses through innovative technology solutions.

CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and it operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network.

Top Wall Street analysts have liked like the stock over the past year as the company transforms itself from a telecom to a technology company. While some have worried over CenturyLink maintaining the dividend, most are positive on the comparisons for the second half of the year and sequential revenue stability. They also cite an update on the data center sale progress and the potential for stock buybacks as additional positives.

CenturyLink investors receive a gigantic 7.83 % dividend. The consensus target price is $29.85. The stock ended trading on Tuesday at $27.44.