Top Telecom Stocks to Buy in 2017

By Adam Levy Markets Fool.com

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Investors interested in the U.S. telecom sector have just a handful of options. The industry is dominated by four main carriers: Verizon (NYSE: VZ), AT&T (NYSE: T), T-Mobile (NASDAQ: TMUS), and Sprint (NYSE: S).

Each company's stock outperformed the S&P 500 average of 10% in 2016. Sprint shares have rocketed higher since mid-summer, up about 141% on the year while AT&T and Verizon produced more modest returns of about 24% and 16%, respectively. T-Mobile produced a return of about 48% in 2016.

But past results are no indicator of the future. Which telecom companies should investors buy in 2017?

The Un-carrier will continue to grab new customers

Over the last couple years, T-Mobile has grabbed the lion's share of postpaid phone subscriber additions. In fact, T-Mobile claims it accounted for over 100% of postpaid phone net adds in 2015, and that pattern continued in 2016. Postpaid phone subscribers are more creditworthy than prepaid customers, pay more per month, and are generally considered the most valuable customers in wireless.

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Investors can expect T-Mobile to again lead the pack in terms of phone net adds. The value-priced service provider should be able to win over a large chunk of customers again in 2017.

Some Sprint customers may switch after they lap the promotional pricing period of Sprint's "Cut Your Bill in Half" offer and start looking for better value. In fact, T-Mobile CEO John Legere noted that it saw an increase in the number of customers leaving Sprint for T-Mobile in the early part of the fourth quarter.

Meanwhile, T-Mobile is working to increase its pricing. It introduced the T-Mobile One plan at the end of August, which charges between $40 and $70 per month for each line depending on how many lines you sign up for. T-Mobile's average service charge per month was $48.15 per month in the third quarter of 2016.

The combination of more customers paying higher average prices should result in strong revenue and earnings growth for 2017. Analysts' consensus forecast for next year is just 9% revenue growth and 20% growth in EPS. I wouldn't be surprised if it surpasses those numbers.

But if you're looking for dividends...

A lot of investors are attracted to the telecom sector for the steady cashflows and the high dividend yields that go along with it. In that case, it's hard to beat Verizon -- although AT&T is a strong alternative.

Verizon offers a 4.3% dividend, and management has raised that dividend in each of the last 10 years. While that's not quite as long as AT&T's 33-year streak of dividend increases, it shows management's commitment to continue raising the dividend for the foreseeable future.

Growth has been hard to come by as T-Mobile and Sprint put pressure on Verizon's pricing. Average service revenue per account has steadily declined over the past couple years and postpaid additions slowed considerably in the second and third quarters of 2016. Analysts expect revenue to grow less than 1% in 2017 after falling an estimated 4.4% in 2016. Earnings growth is similarly stagnant, with expectations of 3% growth, but flat compared to 2015 EPS.

But Verizon's strong network and customer loyalty makes it more attractive than AT&T, which has been bleeding retail postpaid phone subscribers for years. Additionally, with T-Mobile's decision to move toward higher pricing, it should alleviate some of the pressure on Verizon's pricing.

Verizon's move into digital media and advertising may have mixed results, but it remains focused on growing its core wireless business, which is the main generator of earnings and cash flow. With analysts expecting $4 in EPS for 2017, Verizon's dividend payout ratio -- the ratio of dividend payments to net income -- is just 58% compared to AT&T's 66%, so the dividend seems relatively safe.

Investors looking for a high dividend yield with consistent growth should consider Verizon. If you want a telecom with lots of room to grow, take a closer look at T-Mobile.

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Adam Levy owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.