Telecom's Holding Pattern Is A Buying Opportunity

By Aaron Levitt | October 31, 2011 AAA

The recent market volatility has opened up some opportunities in the equity space. A variety of sectors are trading for lower than their peaks and offer long-term investors values. One such sector is the telecommunications industry. A stalled mega-merger between two behemoths is causing the sector to drift along. However, this could provide investors that chance to add some strong dividends, stable cash flows and wide economic moated firms to a portfolio.

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Stuck in Neutral
The Justice Department's recent decision to sue and block AT&T(NYSE: T)'s purchase of Deutsche Telekom(OTCBB: DTEGY)'s T-Mobile unit, has caused a cloud of uncertainty to fall on the sector. However, according to analysts at Morningstar, this "holding pattern" is a great time to pick up shares of the communications firms. Since the acquisition has stalled, the telecoms have fallen behind the broad market and represent an interesting value. The industry has become a model for both growth opportunities and stability, as many large firms have abandoned their old fashioned wire-line operations and have focused on broadband and wireless technologies. Offering services like high-speed video, mobile internet, digital cable and mobile commerce, the sector has cast off its widow and orphan image.

In addition, analysts at Morningstar believe that despite the outcome of the AT&T/T-Mobile deal, more mergers and acquisitions (M&A) are on the way. Smaller firms like MetroPCS Communications (NYSE: PCS) will need to merge or risk being bought-out; this M&A will be another growth catalyst for the sector. The days of being a "boring" industry is long over. (For further reading, check out: Why Do Companies Merge With Or Acquire Other Companies? )

Aside from these growth prospects, the telecommunications sector still maintains one aspect of its previous widow/orphan moniker: high dividends. Firms with the sector are able to create steady revenue streams, by locking in subscribers into multi-year contracts. This allows the telecoms to project their future earnings with more accuracy and provide better profit potential. For income seekers, this translates into some of the highest dividend yields around. The domestic telecommunications sector currently yields nearly 6%, with several firms yielding much more.



Playing the "Holding Pattern"
With the telecom sector offering high growth potential, high dividends and a currently cheap P/E of about 14, investors should use the sectors recent stall to add it to a portfolio. The iShares Dow Jones US Telecom (ARCA: IYZ) is the largest, in terms of assets, and most liquid way to add the sector to a portfolio. The ETF tracks 32 of the largest telecom firms including Verizon Communications (NYSE: VZ) and tower firm SBA Communications (NASDAQ: SBAC). The fund yields a juicy 3.23%. Investors could also use the equally weighted SPDR S&P Telecom (ARCA: XTL).

Suffering from being both European and in the telecom sector, England's BT Group (NYSE: BT) is currently trading for about half of its 2007 high. However, the company recently posted higher than expected earnings. Similarly, both Telecom Italia (NYSE: TI) and France Telecom SA (NYSE: FTE) are trading at near 2002 levels and offer very high dividends and increasing global footprints. Investors may want to consider these international additions to their telecom holdings.

Investors may also want to consider mid-sized player, CenturyLink (NYSE: CTL). The firm has spent more than $38 billion in less than three years on acquisitions and has used those buys well. Sales at the firm more than doubled to $4.6 billion last quarter and CenturyLink is on target to reach 62 cents a share profit, this quarter.

The Bottom Line
For investors, the recent market rout has left a variety of portfolio opportunities open. One such opportunity exists in the telecom sector. The recent stalled mega-merger of AT&T and T-Mobile has caused the sector to fall behind, however, now could be a great time to buy the telecommunications firms. The previous picks along with smaller players like Leap Wireless (NASDAQ: LEAP) make ideal selections. (For further reading, check out: Biggest Merger And Acquisition Disasters. )

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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