Merrill Lynch Has 4 Telecom Yield at a Reasonable Price Stocks to Buy

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Verizon Communications

This top telecommunications company is rated Buy at Merrill Lynch. Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.

The company reported solid second-quarter earnings; however, revenues came in short of Wall Street and Merrill Lynch expectations. The analysts note that management kept guidance in line with expectations, excluding the impact of the strike-related work stoppage.

Verizon also recently announced the purchase of Yahoo’s core operating business for $4.8 billion in cash. The analysts feel it plays into Verizon’s strategic drive to expand into advertising and content, and they also think the transaction is largely immaterial from a financial perspective.

Verizon investors are paid a 4.08% dividend. The Merrill Lynch price target is $59, and the consensus price objective is $54.04. Shares closed Friday at $55.41.

Windstream

This telecommunications company has solid dividend coverage and could have sizable upside as well. Windstream Holdings Inc. (NYSE: WIN) is the sixth-largest U.S. incumbent local exchange carrier and the third-largest rural ILEC, serving 3 million access lines, primarily in small markets and rural communities in 16 states. The company offers residential and business customers local voice, long distance, internet access, high-speed data and enhanced services.

The company has been divesting its holding in Communications Sales and Leasing and recently sold a 50% position, which came to 14.7 million shares. The company is using the proceeds to reduce debt, which the Merrill Lynch analysts feel could be as much as $670 million. The interest expense also will drop dramatically.

Windstream investors are paid a 6.44% dividend. The Merrill Lynch price target is a stout $16, and the consensus target is much lower at $9.02. Shares closed Friday at $9.31.

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The general consensus is that telecom is overbought and a crowded trade, but Merrill Lynch thinks that on a valuation basis it remains very compelling, and from a yield perspective it still makes sense for investors looking for dividends.