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Dividend Opportunities in Telecom

We don't see much in the U.S. telecom industry that's attractive, but Comcast may be a place to start.

Dividend Opportunities in Telecom
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Michael Hodel: For most of 2019, we've been recommending AT&T shares as the most attractive in the U.S. telecom industry, sporting a generous yield in addition to trading at a significant discount to our $37 fair value estimate. However, over the last several months, AT&T shares have rallied strongly, especially after Elliott Management started to take an interest in the company and push for changes in the management team and the corporate strategy.

With this stock now trading at a little bit of a premium to our fair value estimate, we don't see a ton in the U.S. telecom industry that's particularly attractive for dividend-seeking investors. Right now, if we were to pick one stock in the sector, we would look at Comcast. While Comcast shares don't yield as much as AT&T or even Verizon, they still yield about 2%. And importantly, the company doesn't pay out nearly as high a percentage of its free cash flow as AT&T or Verizon do. Comcast pays out about half as much as those two companies, roughly 25% to 30% of its free cash flow, and that gives the firm a lot more room to grow its dividend over time. So, while AT&T and Verizon have been growing their dividends about 2% annually, Comcast most recently raised its dividend 10%. And we think that dividend growth is set to continue over the next several years as Comcast digests the Sky acquisition, continues to repay debt, and continues to shift its focus more towards the dividend and away from share repurchases. And Comcast, we expect, will eventually return to share repurchases once it gets its leverage down to a more comfortable range. But we do think that that dividend will make up a more important portion of the firm's total capital return over time.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.