Published by Bob Ciura on June 18th, 2017
Telecom stocks are widely favored by income investors, thanks to their high dividend yields.
For example, AT&T (T), the largest U.S. telecom, offers a hefty 5% dividend yield right now. And, it has raised its dividend for 33 years in a row.
AT&T is a member of the exclusive Dividend Aristocrats, a group of just 51 stocks in the S&P 500 that have raised dividends for 25+ consecutive years.
You can see the entire list of 51 Dividend Aristocrats here.
There are also high dividend yields among the international telecoms.
European telecom giant Vodafone (VOD) has a slightly higher dividend yield than AT&T, of 5.2%.
Both AT&T and Vodafone rank among a group of 416 stocks with a 5%+ dividend yield.
You can see the full list of established 5%+ yielding stocks by clicking here.
This article will compare-and-contrast these two high-yield telecom stocks.
Business Overview
Winner: AT&T
AT&T and Vodafone are very similar businesses. They each provide telecom services such as mobile, broadband, and TV.
The main difference between the two companies, is their geographic focus.
Vodafone generates revenue from the following markets:
- Europe (74% of revenue)
- Africa, Middle East, and Asia Pacific (23% of revenue)
- Other (2% of revenue)
Vodafone had 516 million mobile customers at the beginning of 2017, with another 31.7 million fixed-service customers.
Its international exposure has been a headwind, due to unfavorable foreign exchange rates. Vodafone’s total revenue declined 4.4% last quarter.
However, organic revenue (excluding currency) increased 1.9% in the most recent fiscal year.
While Vodafone has a heavy presence in Europe and the emerging markets, AT&T is predominantly a U.S. company.
AT&T’s international revenue represented just 4% of total revenue last year, but that hasn’t held it back at all.
AT&T performed very well in 2016. Revenue rose 12%, to $163.8 billion. Cash flow from operations soared 10%, and hit a record $39.5 billion.
Source: 2016 Annual Report, page 2
AT&T generates huge amounts of free cash flow, including $16.9 billion in 2016. AT&T’s free cash flow grew by 70% from 2014-2016.
AT&T’s strong growth is due largely to its recent acquisitions, such as the 2015 acquisition of DirecTV.
The $49 billion deal made AT&T the largest pay TV provider in the U.S. After the takeover, AT&T had more than 19 million customers in Latin America, including Mexico and the Caribbean.
Future acquisitions will be key to both companies’ growth strategies.
Growth Potential
Winner: Vodafone
AT&T is the No. 1 U.S. wireless carrier by revenue and market capitalization. Having the top spot in the U.S. has its benefits, namely a high level of profitability.
But it also means slower organic growth potential, as the U.S. is a highly saturated and competitive market. As a result, AT&T is seeking growth externally, primarily through acquisitions.
AT&T has a pending agreement to acquire media giant Time Warner (TWX), for more than $100 billion.
Source: Time Warner Acquisition Presentation, page 6
This would bring millions of customers to AT&T, while also diversify its service offerings, into media and content.
It seems that AT&T’s growth will be fueled by Latin America and the U.S., while Vodafone’s growth will be in Europe and the emerging markets.
Between these two scenarios, Vodafone’s is the more attractive.
While Vodafone’s current performance lags AT&T’s, it could have stronger growth potential going forward. It has greater exposure to under-developed economies like India.
Vodafone recently announced a merger between its Vodafone India, and Idea Cellular (ICLQY). The acquisition means Vodafone will have an industry-leading position across India.
Source: Vodafone Idea Merger Presentation, page 7
The deal will work as follows—first, Vodafone will receive a 50% stake in Vodafone-Idea, approximately 3.63 billion shares.
Then, Vodafone will sell a 4.9% stake in Vodafone-Idea, to Aditya Birla Group, for $579 million.
The deal accomplishes several strategic priorities for Vodafone. First, it gives Vodafone a huge presence in India.
The merger brings together the second and third-largest carriers in India, to make the new No. 1.
Vodafone will own 45.1% of Vodafone-India, which will have 395 million customers. It will also have the largest share of spectrum in India.
Source: Vodafone Idea Merger Presentation, page 8
India is a difficult market right now, but the long-term benefits are clear to see. India has a population above 1 billion, and a high rate of economic growth. This will elevate millions of people into the middle class.
Plus, the $579 million cash payment will allow Vodafone to repay debt, and improve its balance sheet.
Finally, the deal also presents huge cost savings opportunities for Vodafone.
By the fourth year after the merger, Vodafone expects to reach an annual run-rate of $2.1 billion per year in savings.
In all, the merger has an expected net present value of $10.5 billion for projected cost savings.
AT&T entering content with Time Warner is a strong catalyst, but Vodafone’s potential growth in India gives it the more compelling growth story.
Dividend Analysis
Winner: AT&T
AT&T is a top stock for dividends. It has a current dividend payout of $1.96 per share, good for a 5% dividend yield.
AT&T has raised its dividend for more than three decades.
And, its dividend is highly secure, thanks to its high free cash flow.
In 2016, AT&T’s dividend required 70% of free cash flow, which leaves a cushion for future dividend increases.
Vodafone’s dividend is sustainable as well. Due to the company’s struggles last year, it had a payout ratio of over 100%.
Vodafone paid dividends of $4.59 billion, but only generated $4.48 billion of free cash flow.
The good news is, the company expects free cash flow to recover to approximately $5.6 billion in the current year, which will more than cover the dividend.
One drawback to Vodafone’s dividend is the strong U.S. dollar. Since Vodafone’s dividends are declared in euros, the exact dividend received by U.S. investors will fluctuate, based on current exchange rates.
Of course, if the U.S. dollar declined, it would be a tailwind for Vodafone’s dividend. But, the U.S. dollar is very strong right now, which means dividends paid in euros translate into fewer U.S. dollars.
Another negative for Vodafone’s dividend, is that it is paid on a semi-annual basis. Vodafone pays its dividend twice per year, while AT&T pays its dividend quarterly.
Vodafone’s last two semi-annual dividend payments totaled approximately $1.49 per share for holders of the American Depositary Shares.
This represents an annual dividend yield of 5.2%.
Vodafone has a slightly higher yield of about 20 basis points, but AT&T has a more secure payout, and pays its dividend more frequently.
Final Thoughts
There is a case to be made for either stock. Vodafone has a slightly higher dividend yield, but AT&T has a lower payout ratio and a longer history of dividend increases.
Going forward, Vodafone could be the better pick for dividend growth, if its massive investments in India are successful.
Vodafone may be the better pick for growth, AT&T has better dividend coverage. And, Vodafone’s dividends are suppressed right now, due to the strong U.S. dollar.
This makes AT&T the better pick for risk-averse investors, or those looking for more reliable dividend income.
