Yahoo Finance 4 Telecom Stocks to Weather a Strong Dollar
Much has been made over the last quarter about how the strong dollar has hurt U.S. company earnings. Companies with significant overseas operations see their earnings diminished when they are converted back to U.S. dollars. In the past 12 months, the U.S. dollar has gained approximately 20 percent versus the euro and has made similar gains against other major currencies like the yen.
Meanwhile in Europe, talks to reach a new debt deal for Greece remain deadlocked. A possible outcome if a deal is not reached is that Greece could exit the euro -- an unprecedented event. Such a scenario would no doubt put more downward pressure on the euro and conversely exert upward pressure on the U.S. dollar.
Some sectors of the market are more exposed to a strong dollar than others. For example, the information technology sector derives 57 percent of its revenue from outside the U.S. Some sectors, however, derive almost no revenue from outside the U.S. -- telecoms and utilities are two examples. These sectors are relatively well-insulated from the effects of a strengthening U.S. dollar.
The screen. We used Recognia Strategy Builder to search for U.S. telecom stocks that offer some protection in the event of a continued rise in the U.S. dollar. We began by setting a minimum market capitalization threshold of $5 billion. We searched for larger and more stable companies in the market.
Strong and stable dividend yields are one of the significant attractions of telecom stocks.Therefore, we screened for stocks with indicated annual dividend yields of at least 2.5 percent.
Finally, to ensure we don't overpay for our investments, we screened for companies with reasonable forward price-to-earnings ratios based on analyst estimates. We selected only companies with forward P/E ratios of 30 or less. Here are the results:
CenturyLink, headquartered in Monroe, Louisiana, is the third-largest telecom provider in the U.S. in lines served, behind AT&T and Verizon. The company operates as a local exchange carrier, an Internet service provider, and it also provides long distance service. CenturyLink makes our list with a very strong dividend yield of 6.5 percent and a reasonable forward P/E ratio of just 13. In early May, the company announced first-quarter results, which beat analyst estimates on earnings but missed narrowly on revenue.
AT&T is a household name in the U.S. and throughout the world. AT&T is the largest provider of fixed line telephone services in the U.S. and the second-largest provider of wireless service. AT&T has long been a favorite of conservative investors due to its strong and consistent dividend, currently sitting at $1.88 per share or 5.4 percent yield. In 2014, AT&T announced an agreement to purchase satellite operator DIRECTV. Regulatory approval of this merger is still pending.
Verizon Communications is the largest telecom company in the U.S. by market capitalization, with an enterprise value of over $200 billion. Verizon is also the largest wireless provider in the U.S. On May 12, Verizon announced it would acquire AOL for approximately $4.4 billion. This news received mixed reviews in the financial community, and the stock has since declined slightly. With a dividend yield of 4.4 percent and an extremely reasonable forward P/E of 13.5, Verizon is an attractive long-term investment that is well-insulated from a strengthening U.S. dollar.
Frontier Communications, based in Stamford, Connecticut, is the nation's fifth-largest telecom company. Frontier's stock has struggled since February, when it announced a plan to buy over $10 billion of Verizon wireline assets. The stock has declined over 22 percent so far this year. This sharp decline has left the stock with a very attractive dividend yield of 8.2 percent -- the highest of any company on our list. Frontier has more risk as an investment than some of the other companies on this list, but it may reward a patient investor in the long term.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described in this article had a 13.8 percent annualized return, compared with 14.3 percent for the Standard & Poor's 500 index and 12.5 percent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton of Recognia is a blogger for The Smarter Investor. You can follow him and Recognia on Twitter at @Recognia_Peter and @Recognia.
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