Investing

Despite Gains, 4 Big Dividend-Paying Telecom and Utility Stocks Are Still Buys

In a year when almost every sector is still mired in negative performance, or flat at best, the telecom and utility sectors have posted double-digit gains. Despite analysts’ end-of-the-year warnings that both sectors would not be good plays because of the potential for rising interest rates, both sectors have been on fire.

The question for investors is simple: Can the sectors keep going, or should profits be taken? With the Federal Reserve still very nervous on the economy, many strategists think only one more rate increase is in the cards, and with the yield on the long Treasury bond at the same level it was last year, the top telecom and utility stocks could still have legs going forward.

We screened the Merrill Lynch research database and found four companies rated Buy that investors could still add to portfolios at current levels.

AT&T

This company will continue to serve customers regardless of where oil or the Chinese yuan trade, and it is on the Merrill Lynch US 1 list. 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 shares trading at a very cheap 12.5 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.

While fourth-quarter earnings were in line with forecasts, and slightly below the Wall Street estimates, a change in accounting for the entertainment group lowered revenue/EBITDA by $300 million for the quarter. Merrill Lynch noted that this knocked three cents per share off the bottom line numbers. All in all, a solid quarter, and another reason for conservative accounts to own the stock, especially with solid DirecTV adds and mid-single-digit earnings growth estimated for the balance of 2016.

Some analysts now expect the company to become the biggest user of OpenStack cloud computing software worldwide as it expects to build out its private cloud to 500,000 nodes (servers) and span across hundreds of data centers. OpenStack helps corporate IT departments manage data centers packed with computer servers. Rackspace Hosting and government space agency NASA co-developed OpenStack in 2010, aiming to make the software a cloud computing standard.

AT&T investors receive a huge 4.95% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus price target is $37.85. Shares closed Wednesday at $38.77.


Entergy

This higher yielding utility was recently upgraded and makes the buy list at Merrill Lynch. Entergy Corp. (NYSE: ETR) is an integrated energy company engaged primarily in electric power production and retail distribution operations. It owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including nearly 10,000 megawatts of nuclear power, making it one of the nation’s leading nuclear generators. Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy has annual revenues of more than $12 billion.

Many analysts like the position of the company’s plants, as they supply some of the petrochemical industry along the Gulf Coast. Petrochemical plants and liquefied natural gas export facilities are springing up all across the central Gulf coast. For the petrochemical industry, the boom is driven by demand, not supply, and so the current lower gas prices actually help this growth trend, which has been a solid revenue silo for Entergy.

The company posted very solid earnings recently, and the guidance for the rest of the year was very good despite some concerns over industrial sales. With a higher dividend than many of its peers, the company can be bought and put away for the long haul.

Entergy investors receive a 4.36% dividend. Merrill Lynch has an $80 price target, and the consensus target is $74.63. The stock closed Wednesday at $78.02.