Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Band Rings Up Global Telecoms
12/02/2005 12:00 am EST
"Global telecommunications companies offers some of the world’s highest and safest dividend yields," says Richard Band. Here, the advisor takes us on a "world tour" as he reviews his three current favorite foreign telecom plays—in Germany, Britain, and China.
"We believe it is important for telecom Investors in telecom to diversify their holdings. In this context, diversification means owning foreign telecom companies in addition to your domestic positions.Overseas, my #1 buy is Germany’s Deutsche Telekom (DT NYSE). DT is trading at about four times cash flow, a deep discount to the average industrial stock in either country. The stock also throws off a generous 4% dividend (paid once a year, in early May). Competition isn’t quite so severe for DT as for American telcos. Thus, I suspect that the company’s earnings may grow faster over the next five years than its US peers. If you don't own DT, I urge you to buy a few shares now. At just over four times cash flow, DT is one of the cheapest blue chips anywhere on planet. "For your retirement account, consider BT Group (BT NYSE), parent of British Telecom. The company is likely to grow somewhat more slowly than Deutsche Telekom, but the stock yields almost 5%. In addition, Tony Blair has abolished the United Kingdom’s withholding tax on dividends paid to Americans. (Germany still nicks you for 21.1%, although you can take a credit against the tax if you hold DT in a taxable account.) Buy BT at $38 or less.
"Finally, if you’re in a quest for blue sky, go with China Telecom (CHA NYSE). The company has asked the Chinese authorities for a license to build a wireless network. How soon the request might be granted is, like many things in China, a mystery laced with politics. However, even if CHA stays tethered to its fixed-line business for the next couple of years, the company’s earnings should grow at a double-digit rate. Shouldn’t a stock with such a robust growth outlook sell for more than ten times this year’s estimated profits? I think so. CHA also yields a tad over 2%. Pay up to $37. I estimate that each of the telcos recommended here will generate a total return (dividends plus capital gains) of at least 60% over the next four or five years. CHA packs the greatest upside potential, projected at 70%-100%."