With interest rates near 0% and traditional income investments like savings accounts and certificates of deposits (CDs) earning next to nothing, blue chip telecom stocks like AT&T (NYSE: T) and Verizon (NYSE: VZ) have become wildly popular.
That makes sense. Telecom is a “recession-proof” industry. Regardless of what’s happening with the economy, people will still need cell phones and cable TV. And with both stocks yielding close to 4.5%, both companies look like a good choice for income investors in search of high yields.
AT&T and Verizon sport P/E ratios of 16 and 20, respectively — well above the S&P 500s historical average of 15.
And while a 4.5% dividend yield might seem like a lot, in the telecom industry, you can find much higher yields… and at a much better price.
For example, I’ve found a telecom that’s currently yielding 8.4%.
It enjoys the same competitive advantages as both AT&T & Verizon, and better yet… it’s trading at a P/E ratio of 10.5 — making it a much better value than AT&T or Verizon.
But you’ve probably never considered this company. In fact, I doubt you’ve ever heard of it.
That’s because the company — Telefonica Brazil (NYSE: VIV) – isn’t based in the United States. But before you dismiss this as just another “risky foreign stock,” hear me out…
As one of two Brazilian fixed-line operators, Telefonica Brazil is one of the largest players in the business. The company has 11 million fixed-line clients, 3.5 million broadband users and 680,000 pay-TV subscribers.
In fact, not only does the company dominate both the fixed-line and broadband businesses, but with its recent acquisition of Vivo Wireless, Telefonica is now also the largest wireless operator in Brazil.
Due to the company’s size, it’s unlikely that this stock will provide blockbuster growth. But even so, after the recent acquisition, Telefonica Brazil was still able to grow its wireless revenues 20.5% year-over-year… helping boost the company’s revenue by a modest 3.7% during the same period.
And with a current net margin of 15%, the company is solidly profitable. By comparison, both AT&T & Verizon sport net profit margins of less than 10%.
Now to be fair, Telefonica Brazil has sold off recently after the Brazilian government announced its intention to lower certain fees wireless communication companies can charge. In response to the threat of heightened regulation, the stock has pulled back roughly 12% since July. And that decline came on the heels of another drop in the shares earlier this year. All told, shares of VIV are now trading 30% below their highs from early 2012.
This big pullback has given investors a great buying opportunity…
Telefonica Brazil now sports a P/E ratio of 10.5… well below the industry average of 20.5.
And as I showed you a moment ago, Telefonica Brazil is already much more profitable than its U.S. counterparts. So even though its margins may fall as the government puts pressure on the industry to lower fees, I’m confident Telefonica’s margins will remain head and shoulders above AT&T’s and Verizon’s.
And if you’re investing in Telefonica in search of big yields, then you can rest easy. With a dividend payout ratio of just 44%, the company can afford to take a hit to its bottom line and still keep up its dividend payments.
So even with the new regulations, I think Telefonica Brazil — and its 8.4% dividend — is safe.
Of course with investing, nothing is 100% certain. Shares of Telefonica Brazil could always be subject to another pullback, as we’ve seen in the past few months.
But it just goes to show that when it comes to income investing, you don’t have to settle for the below average yields offered by American equities.
Action to Take –> There are hundreds of other foreign blue chips — just like Telefonica Brazil — that are paying much higher yields than their U.S. counterparts. And better yet, most of them trade at more attractive valuations.
So if today’s low interest rate environment has you starved for higher yields, then it’s time to start looking at foreign markets.
– Paul Tracy
P.S. You may wonder how I calculated the yield on Telefonica Brazil (NYSE: VIV). Here’s some background: Specifically, over the past 12 months, VIV has paid a total of just under $2 per NYSE-traded ADR. Based on the current share price of $21.94, that works out to just under a 9% yield. Most of the analysts who follow the stock are estimating an 8% to 9% total yield to be paid in 2012 . What’s interesting is that VIV actually makes more than two payments per year: it makes dividend payments as well as 2 or more “interest on capital” payments annually. Some stock quoting services appear to be improperly excluding the interest on capital payments from the yield calculation.
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Source: StreetAuthority
Paul Tracy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of T, VIV in one or more if its “real money” portfolios.
