With the broad equity market under pressure in recent months, telecommunications stocks might offer a safe haven.
“Telecom stocks looked boring when markets were willing to pay anything for growth stocks versus value,” Bank of America analysts wrote in a commentary.
“As growth stories run out of steam and … valuations get revised lower, we believe telecom’s stability looks attractive by comparison.”
The analysts identify two stocks to buy and one to avoid. First, let’s look at the buys.
It has the 10th highest dividend yield in the S&P 500, the analysts noted. AT&T has vastly outperformed the S&P 500 index, rising 13% so far this year.
But the company still trades at a near all-time low 8 times earnings, compared to 10 times historically, the analysts said. It also has a 40% payout ratio on its free cash flow.
They said the company has beaten wireless subscriber expectations for four straight quarters. “AT&T is taking a new, conservative approach in dealing with the Street and managing the refocused communications business,” the analysts said.
“So for maybe the first time in many years, AT&T [can] … evolve into a beat [earnings estimates] and raise [those estimates] story.”
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“T-Mobile is an established beat and raise story, which it did again in the first quarter,” the analysts said.
“TMUS has the best 5G network in the U.S. (more speed, greater coverage) with a multi-year lead over Verizon.” T-Mobile also has the lowest prices in the market, they said.
Meanwhile, “Verizon and AT&T just raised prices, leaving room for TMUS to either raise prices, or, more likely, take share,” the analysts said.
Implementation of T-Mobile’s merger with Sprint and the resulting savings are “running well ahead of expectations, creating a self-help story that makes the impact of inflation on costs nearly irrelevant,” they said.
Also, T-Mobile is slated to soon launch a three-year, $60 billion stock buyback program that could syphon off about 80% of the free float.
As for the stock to avoid, that’s:
Lumen’s high dividend yield of 8.4% risks a reduction, the analysts said. “Its business is in unrelenting decline, and we see the dividend as unsustainable,” they said.
“LUMN is the last-to-market copper company transitioning to fiber, and as such is prioritizing investment while also on track to pay out all of its estimated 2023 free cash flow as dividends.”
The company wants to keep leverage stable, but it’s unclear how that is possible, given conflicting capital allocation priorities, the analysts said. They noted that Lumen’s seven-year bond yield has soared 80% this year to over 9%. And the company is on watch for a credit downgrade.
“We have seen this movie before, and it never ends well for an over-levered, declining telephone business struggling to sustain its dividend, while the bond market grows increasingly concerned about leverage.”