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Phone Stocks: The New Treasuries?
You do not need to search far to find prophets of doom warning you away from one asset class or another. Normally, I pay no particular attention to this - it is the ongoing differences of opinion between investors that give us a vibrant market, and there is certainly money to be made in finding creative ways to shout "we're all doomed!" on financial TV.
Still, I cannot help but wonder about certain investment opportunities. There are plenty of reasons to be skeptical about the return potential in U.S. Treasury securities, and I wonder if investors can do better for themselves with other instruments. Specifically, I am interested in comparing the investment prospects of government bonds to those of major telecommunications companies.
No Contest
If all you want is the highest yield, the battle is a first-round knockout. The 10-year Treasury currently yields just under 3%, while the 30-year Treasury is priced to yield about 3.9%. Those are incredibly low yields on a historical basis, and if you buy these bonds today, there is a very good chance you are going to see the yields rise (and the prices decline) with time.
By comparison, Verizon (NYSE:VZ) currently yields 7.1%, AT&T (NYSE:T) yields 6.9%, Philippine Long Distance (NYSE:PHI) yields 6.6%, Telekom Indonesia (NYSE:TLK) yields 5.7%, and France Telecom (NYSE:FTE) yields 4.7%. These yields are quite high on a historical basis, and it may not be unreasonable to think the future bias of prices is higher.
Some other factors to weigh: The American telecom firms pay dividends four times a year, while foreign firms generally pay twice a year. Also, remember that the dividends from stocks are taxable at the state level, whereas federal government bond interest is not. (For more, see Bond Basics Tutorial.)
IN PICTURES: 8 Ways To Lose Money On Bonds
What About the Balance Sheets?
Like our government, the phone companies carry a lot of debt. Unlike the government, the phone companies have to pay back this debt or they can be forced into bankruptcy and see their assets auctioned off. Likewise, phone companies cannot tax or inflate their way out of debt troubles - you could argue that raising prices is like raising taxes, but a Verizon customer can avoid higher bills much more easily and legally than higher federal taxes.
Said differently, the market is likely to cut off debt-addicted companies much faster than a debt-addicted government.
Expensive Future Obligations
Both the federal government and the phone companies are facing a seemingly endless cycle of expensive capital upgrades. Our government really needs to get in gear with allocating money to roads, bridges, schools and other infrastructure projects; failure to do so will bring more accidents like theMinneapolis
By comparison, market pressures will force phone companies to continue their upgrade cycles. Despite seemingly endless upgrades to "next-G" infrastructure, if these companies fail to keep their networks up to speed (literally and figuratively), they will see their customers quickly drop their service and move to better networks.
The Bottom Line
Maybe comparing Treasuries to telecom stocks is a false comparison, but I am not so sure. After all, the argument for traditionally conservative investments like government bonds is that you get a steady stream of income with relatively low price risk. Given the issues with theU.S.
On the flip side, phone stocks have gotten smacked by a combination of low earnings momentum, weak future growth prospects, and high ongoing capital investment needs. Those concerns are all real, but I think you can argue that the stocks have gotten pushed to levels where there is not a huge amount of price risk in the coming years. Consequently, investors looking to reap some investment income without taking major price risk just might want to think about taking some of their bond money and putting it into high-yielding, stable businesses like those offered by telecoms. (For further reading, check out Dial Up Choice Telecom Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Still, I cannot help but wonder about certain investment opportunities. There are plenty of reasons to be skeptical about the return potential in U.S. Treasury securities, and I wonder if investors can do better for themselves with other instruments. Specifically, I am interested in comparing the investment prospects of government bonds to those of major telecommunications companies.
No Contest
If all you want is the highest yield, the battle is a first-round knockout. The 10-year Treasury currently yields just under 3%, while the 30-year Treasury is priced to yield about 3.9%. Those are incredibly low yields on a historical basis, and if you buy these bonds today, there is a very good chance you are going to see the yields rise (and the prices decline) with time.
By comparison, Verizon (NYSE:VZ) currently yields 7.1%, AT&T (NYSE:T) yields 6.9%, Philippine Long Distance (NYSE:PHI) yields 6.6%, Telekom Indonesia (NYSE:TLK) yields 5.7%, and France Telecom (NYSE:FTE) yields 4.7%. These yields are quite high on a historical basis, and it may not be unreasonable to think the future bias of prices is higher.
Some other factors to weigh: The American telecom firms pay dividends four times a year, while foreign firms generally pay twice a year. Also, remember that the dividends from stocks are taxable at the state level, whereas federal government bond interest is not. (For more, see Bond Basics Tutorial.)
IN PICTURES: 8 Ways To Lose Money On Bonds
Like our government, the phone companies carry a lot of debt. Unlike the government, the phone companies have to pay back this debt or they can be forced into bankruptcy and see their assets auctioned off. Likewise, phone companies cannot tax or inflate their way out of debt troubles - you could argue that raising prices is like raising taxes, but a Verizon customer can avoid higher bills much more easily and legally than higher federal taxes.
Said differently, the market is likely to cut off debt-addicted companies much faster than a debt-addicted government.
Expensive Future Obligations
Both the federal government and the phone companies are facing a seemingly endless cycle of expensive capital upgrades. Our government really needs to get in gear with allocating money to roads, bridges, schools and other infrastructure projects; failure to do so will bring more accidents like the
By comparison, market pressures will force phone companies to continue their upgrade cycles. Despite seemingly endless upgrades to "next-G" infrastructure, if these companies fail to keep their networks up to speed (literally and figuratively), they will see their customers quickly drop their service and move to better networks.
The Bottom Line
Maybe comparing Treasuries to telecom stocks is a false comparison, but I am not so sure. After all, the argument for traditionally conservative investments like government bonds is that you get a steady stream of income with relatively low price risk. Given the issues with the
On the flip side, phone stocks have gotten smacked by a combination of low earnings momentum, weak future growth prospects, and high ongoing capital investment needs. Those concerns are all real, but I think you can argue that the stocks have gotten pushed to levels where there is not a huge amount of price risk in the coming years. Consequently, investors looking to reap some investment income without taking major price risk just might want to think about taking some of their bond money and putting it into high-yielding, stable businesses like those offered by telecoms. (For further reading, check out Dial Up Choice Telecom Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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