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All Contents © 2019The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| March 9, 2018
Telecom stocks are favorites of income investors because of their sometimes generous yields. However, as leading telecommunications firms begin rolling out 5G technology, investors may find new reasons to own these stocks.
5G is the fifth generation of mobile wireless technology and a major step up from previous versions. 5G will greatly accelerate download speeds, improve response times and enable networks to connect to many more types of devices.
Wide-ranging applications for 5G in new markets such as video streaming, smart manufacturing and driverless cars will fuel revenue gains for companies providing 5G service and technology. Networking giant Ericsson (ERIC) predicts a 5G market surpassing $1.2 trillion within 10 years. Facebook (FB) CEO Mark Zuckerberg envisions “killer applications” for 5G in virtual reality games, and other techies think 5G will drive major advances in telemedicine and robotics.
5G-ready telecoms, then, will be able to keep pace with exponential growth in data demand, trim costs and tap into new sources of revenues. They also will benefit from significantly reduced operating costs. Ericsson estimates that 5G networks can deliver mobile data at a tenth of the cost of basic 4G service.
These six technology and telecom stocks are poised to benefit from 5G rollouts over the next two years. In the meantime, these companies are rewarding investors with good-to-great dividend yields.
Data is as of March 8, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $227.8 billion
Dividend yield: 5.3%
AT&T (T, $37.11) is the world’s largest communications company by revenues and a major provider of cable, satellite TV, wireless and broadband services.
Rolling out 5G is a top priority for AT&T this year. The company already has named the first three cities that will receive service – Waco, Texas; Dallas; and Atlanta – and will follow up by actually launching 5G plans in early 2019.
Another pressing priority is completing its merger with entertainment giant Time Warner (TWX), which is awaiting approval from the Department of Justice. Time Warner is expected bring growth opportunities to AT&T beyond its primary phone carrier business – namely, content – and complements the DirecTV business it acquired last year. Time Warner’s entertainment assets include TBS, TNT, HBO and the Warner Brothers movie studio. The acquisition provides AT&T with premium content for delivery to its subscribers and creates an industry behemoth with 140 million-plus mobile subscribers and 45 million-plus video subscribers. The merger also is expected to add a little less than $30 billion annually to AT&T’s revenues.
A massive debt load comes with this $85 billion merger, however, though AT&T will trim that by selling assets. The company sold assets valued at $4.2 billion last year and plans a public offering of its stake in DirecTV Latin America.
AT&T is a Dividend Aristocrat that has raised its annual payout 34 years in a row. Dividend growth has averaged around 2% per year.
Market value: $199.2 billion
Dividend yield: 4.8%
Verizon Communications (VZ, $49.01) ranks as a top wireless service provider, serving more than 116 million wireless customers. The company’s wireless network covers 98% of the United States.
Verizon added 2.1 million net phones to its customer base in 2017, including 1.8 million smartphones. The company expects to triple the size of its media business over the next two years by leveraging the digital content and advertising assets it acquired with the purchases of AOL and Yahoo. Adding those to the mix expands Verizon’s advertising audiences to 1.3 billion potential viewers.
In advance of rolling out 5G, Verizon strengthened its fiber assets last year by acquiring Straight Path and XO Communications. The company successfully trialed 5G in 11 residential markets in 2017 and plans to commercially launch 5G in three to five markets in 2018. Verizon estimates its initial 5G market opportunity at 30 million American households.
Verizon has increased its dividend 11 years in a row. Savings from tax reform are expected to add $3.5 billion to $4.0 billion to cash flow this year and support future dividend growth.
Scotiabank analyst Jeff Fan points to tax reform as a major positive for this company and recently upgraded his rating on VZ to “Outperform.”
Market value: $92.9 billion
Dividend yield: 3.7%
Qualcomm (QCOM, $61.82) is a world leader in semiconductors and telecommunication equipment. The company generates the majority of its revenues from chips for smartphones and technology licensing.
The company has agreed to acquire NXP Semiconductor (NXPI) in a $38.5 billion deal that will extend its presence in the “internet of things” market. IOT connects the internet to any object with embedded electronics such as vehicles, household appliances, payment terminals and medical devices. NXP is a leading maker of chips for this $170.6 billion worldwide market. The combined businesses will generate more than $30 billion in annual revenues. Qualcomm also anticipates cost savings from the merger of $500 million per year within two years.
Chipmaker Broadcom (AVGO) made a bid to acquire Qualcomm in what would be the largest-ever technology deal, but the two companies remain far apart on price. Broadcom’s most recent Qualcomm offer is $79 per share – actually lower than its initial bid of $82. Moreover, there are regulatory hurdles to clear, such as fears that letting the Singapore-based company buy Qualcomm would give China an advantage in setting 5G-technology standards.
Qualcomm has increased dividends seven years in a row, and annual payout expansion has been a brisk 11.6% over the past three years.
Canaccord Genuity analyst Michael Walkley rates Qualcomm a “Buy” and recently raised his price target to $86, noting the earnings power acquired with NXP.
Market value: $31.9 billion
Dividend yield: 3.2%
At one time, Finland-based Nokia (NOK, $5.87) was a world leader in the smartphone market. However, the company sold its smartphone business to Microsoft (MSFT) four years ago to focus instead on network and IP infrastructure, software and technology licensing.
New licensing agreements and a one-time payment from a lawsuit helped Nokia deliver 57% revenue growth last year. Licensing is the growth engine for the company, expected to fuel 10% annual gains in recurring revenues through 2020.
Nokia recently launched its end-to-end 5G Future X architecture and expanded it collaboration with China Mobile (CHL) to trial its new architecture in the China market. Capital spending will limit networking profits in 2018, but Nokia expects networking sales to climb over the next two years as 5G rollouts commence and then accelerate in 2020.
The company also anticipates cost savings from its merger with Alcatel Lucent of around 1.2 billion euros annually, beginning this year.
Bank of America analyst Tal Liani recently upgraded his rating on Nokia to “Buy,” citing improvements in company’s routers business this year and 5G rollouts beginning next year.
Nokia does pay out a dividend, but investors should know that its payout has been a little tumultuous in recent history. That is, in 2013, the company announced it would not pay a dividend for the first time in 143 years. Since then, the company has returned to payouts, and Nokia says it’s committed to growing that dividend in 2018. It targets this year’s payout at between 40% and 70% of earnings.
Market value: $219 billion
Dividend yield: 2.6%
Cisco Systems (CSCO, $44.34) is transitioning its business from traditional switches and router hardware to cloud computing and subscription-based software.
The company has completed several major acquisitions in the software space in recent years, including Jasper Technologies ($1.4 billion), AppDynamics ($3.9 billion) and most recently Broadsoft ($1.9 billion) – the industry leader in cloud-based call center software.
Cisco aims to capture share in the mobile 5G market by offering more flexible software-based alternatives to traditional networking gear. The company is working with more than 20 network operators to launch cloud-based solutions that deliver much of the functionality of 5G on existing equipment without the need for major hardware upgrades.
Cisco began paying dividends in 2011 and has raised payments every year, including a 14% increase in 2018. The company also recently authorized $25 billion in additional share repurchases.
Goldman Sachs analyst Rod Hall initiated coverage of CSCO in 2018 with a “Buy” rating and a Street-high price target of $48. He noted 2018 as a turning point in Cisco’s transition to a software subscription-based business model.
Market value: $77.3 billion
Dividend yield: 5.9%*
Vodafone Group (VOD, $28.80) is a leading multinational mobile telecom carrier. The company generates the majority of its revenues in the United Kingdom and rest of Europe, and also has a strong presence in Asia and Africa, which account for a third of its revenues. With 522.8 million mobile customers and 18.8 million fixed broadband customers, Vodafone ranks second behind China Mobile as the world’s largest mobile operator.
Vodafone has strong growth opportunities in India, where it has merged with Idea Cellular to create India’s biggest carrier. The combination also creates opportunities for cost savings, which Vodafone estimates at $2.1 billion per year by the fourth year after the merger.
Vodafone has partnered with Huawei, Ericsson, Nokia, Qualcomm and Intel (INTC) to research 5G technologies and prepare its networks to transition to the 5G standard. The company recently tested the world’s first 4G-to-5G live data call and has additional 5G trials planned across Europe in 2018.
Vodafone has paid dividends since 1999, and recent growth has averaged 2% per year. Vodafone pays its dividend in euros, so amounts can fluctuate, depending on exchange rates. Payments are made semi-annually, too, which differs from its American brethren.
*Vodafone’s dividend yield is calculated based on its previous two dividend payouts – a common method of calculating yield for companies with variable semi-annual dividends.
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