If You Can Only Buy One Telecom Stock, It Better Be This One (Plus: 2 to Sell)
Google the words “telecom layoffs,” and you get plenty of stories about industry job losses in the U.S. and Canada. That makes it very tough to decide the top telecom stock to buy and the top telecom stocks to sell.
The iShares U.S. Telecommunications ETF (BATS:IYZ) tracks the performance of the Russell 1000 Telecommunications RIC 22.5/45 Capped Index (USD), a collection of U.S. telecom stocks. IYZ has 20 holdings invested in the ETF’s $322 million net assets.
IYZ is down nearly 3% year-to-date, 22 percentage points worse than the S&P 500. Over the past five years, the ETF is down 82% relative to the index. The telecom industry remains an investment backwater.
While the industry may rebound soon, I wouldn’t bet on it.
So, from IYZ’s 20 holdings, I’ve got a stock recommendation to buy and two more to sell.
The first of my three telecom stocks is T-Mobile (NASDAQ: TMUS), the country’s third-largest wireless carrier. It solidified this position in 2020 with its $26.5 billion merger with Sprint, America’s fourth-largest wireless carrier.
The mastermind behind the merger was then T-Mobile CEO John Legere. He first led the company through a turnaround and then a merger over the seven and a half years when he was at the helm.
They say you’re a successful CEO when you leave the company you ran in a better position than you found it. Legere did that, so TMUS is my telecom stock to buy.
In March, T-Mobile made the entertainment news when it announced that it would pay $1.35 billion for Mint Mobile, the discount mobile phone network partly owned by actor Ryan Reynolds. The Deadpool actor is said to have made as much as $300 million from his early investment in Mint.
The company releases its Q2 2023 results after the markets close today. Analysts expect $19.33 billion in revenue (-2% over last year) with earnings per share of $1.69, down slightly from a year earlier.
Despite the so-so quarter, analysts really like T-Mobile. Of the 28 covering its stock, 25 rate it Overweight or an outright Buy with a median target price of $175.50, well above its current share price.
Verizon Communications (VZ)
Verizon Communications (NYSE:VZ) is the first of two sell recommendations. VZ stock is down more than 14% YTD and 34% over the past five years. If not for annual dividends of $2.61 a share, VZ would be a total bust.
Both Verizon and my second sell recommendation are in a public relations nightmare. The Wall Street Journal published an article in mid-July that revealed a lot of old lead-covered coaxial cables in existence that could be very detrimental to the environment and Verizon’s stock.
Verizon is testing the areas mentioned in the article for lead contamination. Several analysts lowered their ratings on its stock. Company chief financial officer Tony Skiadas said during its Q2 2023 conference call that the amount of lead-sheathed cables is small but failed to give a specific number.
“As a result of the age of this infrastructure and the history of the industry, records are incomplete as to exactly how much of the cable in our network has lead-sheathing,” Fierce Telecom reported the CFO’s comments.
“There are a number of unknowns in this area, including whether there is a health risk presented by undisturbed lead-sheathed cable, and if there is a risk, how that risk should be addressed.”
So, the cost to clean up this little problem the company has likely known existed for years could cost as much as $4.1 billion, according to a New Street Research estimate.
Only the most aggressive value investors should get anywhere near this situation. And Verizon’s not even the worst of the telecom stocks.
For years, dividend investors extolled the virtues of AT&T (NYSE:T), the Dividend Aristocrat that could do no wrong.
Here’s what one Motley Fool contributor had to say about AT&T in May 2019:
“AT&T has raised its dividend annually for 34 straight years and pays a forward yield of 6.5%. It trades at less than nine times forward earnings. Those figures make the telecom giant seem like an ideal long-term income investment, but the stock’s lackluster returns in recent years raise questions about its core business,” stated Leo Sun in 2019.
Of course, AT&T got booted from the Dividend Aristocrats in January 2022 because it paid the same annual dividend amount for two consecutive years.
It cut its dividend nearly in half in May 2022 to account for the loss of revenue and income from Warner Media, which it combined with Discovery Communications to form Warner Bros. Discovery (NASDAQ:WBD), a legacy move by overpaid media empire builder, David Zaslav.
As a result of the money-losing asset dump by AT&T, it now pays $1.11 a share in annual dividends. However, its share price has imploded since late 2019, so it still yields 7.5%.
If you’re a dividend investor, there are many better stocks whose CEOs care about rewarding shareholders rather than spending their cash aimlessly. With approximately 6,000 stocks listed on the NYSE and Nasdaq, why on earth would you pick AT&T?
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.