In an earlier article, I listed the highest-yielding stocks by industry and a few telecoms I considered suitable candidates for further research. But it’s important to take a closer look at these stocks, simply because a high yield doesn’t necessarily mean high quality. Buying a stock based on its yield alone is extremely risky. Just as you would never buy a car without looking under the hood, you should never buy a stock without evaluating all of its fundamentals. My closer look at the highest-yielding telecom stocks revealed several potential values and a few high-risk dividend traps.
Here they are…
1. Portugal Telecom
Yield: 14.6%
Portugal Telecom, SGPS (NYSE:PT), the largest telecom operator in Portugal has been hurt by mandated rate reductions and southern Europe’s deepening financial crisis. The company recently posted third-quarter profits 29% lower than last year at $83 million, and analysts look for just 3% growth for each of the next five years.
Cash-flow coverage of the dividend was decent at 130%, but Portugal Telecom has a massive debt load totaling $14.6 billion, or six times cash flow. To be able to cut debt faster, the company halved its dividend last June to an annual rate of just 43 cents, which implies a forward yield of about 8.5%.
2. France Telecom
Yield 13.6%
The largest French telecom has lost 30% of its market value this year because of Europe’s economic woes and a price war with a new mobile provider. The company’s cash flow dipped 7% in the third quarter to $4.8 billion, and France Telecom SA (NYSE:FTE) is guiding for a further drop in cash flow totaling just $9 billion in 2013.
The good news is even with reduced cash flow, the company will still have plenty to cover the $5.6 billion annual dividend.
3. NTELOS Holding Corp.
Yield 12.7%
NTELOS Holdings Corp. (NASDAQ:NTLS) provides high-speed voice and data services to subscribers in the eastern and southeastern United States. Roughly 40% of the company’s revenue comes from a wholesale wireless service supplier agreement with Sprint. A major worry for investors is that Sprint won’t renew this contract when it expires in 2015.
NTELOS’ earnings per share (EPS) from continuing operations dropped 30% in this year’s third quarter to 22 cents. Analysts anticipate no better than 3% annual EPS growth in the next five years. While trailing 12-month cash flow of $100 million easily covers the $49 million dividend, NTELOS is weighted down by $451 million of debt. Last year, this company reduced its annual dividend by 25% to $1.68 a share.
4. City Telecom
Yield 12%
City Telecom (H.K.) Limited (NASDAQ:CTEL) has solid 12-month EPS of $12.18 and more cash than debt. Clouding this otherwise rosy picture is the company’s recent sale of its telecom operations in order to become a pure play in TV content.
Launching an entirely new business positions City Telecom as a start-up, so the company plans to eliminate its dividend altogether for three years so it can invest in its TV operations.
