Telecom companies enjoy a well-earned reputation as some of the best dividend-paying stocks on the market. Unfortunately, the concentrated nature of the U.S. wireless market means there are only a handful of viable stateside options in the industry.
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Telecom investors looking for something slightly more exotic than blue-chip stocks like AT&Tand Verizon Communications can look to international telecommunications stocks as a way to expand the number of potential opportunities while remaining exposed to the industry at large. Using this as a jumping-off point, let's review why names like Vodafone (NASDAQ: VOD) and SoftBank (NASDAQOTH: SFTBF) are two of the best international telecom stocks for income investors today.
The British telecom giant swung to a significant loss on paper in 2016, which caused Vodafone stock to underperform its benchmark, the Nasdaq Composite, by 40% over the past 12 months. However, much of the below-the-line carnage resulted from Vodafone's using deferred tax assets to turn 1.3 billion Great British Pounds (GBP) of operating profits into a net loss of GPB 3.8 billion (a $4.7 billion loss at today's current exchange rate). Companies can do this for any number of reasons, but the most common reason to intentionally swing to a net loss is to reduce income tax expenses in the near term. This is, of course, a one-time event for the company, and Vodafone is generally a profitable company. As such, investors should look at Vodafone as the international telecom equivalent of AT&T or Verizon Communications.
The company generates roughly two-thirds of its revenues from Europe -- mostly Germany, the U.K., Italy, and Spain -- and the remainder of its sales come from emerging markets, notably India. Its European operations tend to be mature, slow-growing spaces. However, India represents an interesting opportunity for Vodafone and its investors. The company continues to aggressively move deeper into the rapidly expanding Indian telecommarket, most recently via a deal to merge its Indian telecom subsidiary with Indian telecom operator Idea. The combined entity will create a mobile operator that will hold the first or second largest market share in 21 of India's 22 coverage regions.
As a fairly mature company, Vodafone is so large today that significant revenue growth seems unlikely. However, as an established incumbent with a 5.9% dividend yield, Vodafone presents an intriguing opportunity for international telecom investors.
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Though SoftBank pays a dividend -- yielding a paltry 0.6%-- the Japanese telecom giant's continued revenue growth story plays a far more prominent role in its investing thesis than its cash distributions. Led by founder and CEO Masayoshi Son, the company has entered and exited a diverse number of industries over the years. Today,SoftBank generates the bulk of its revenues from providing telecommunications services in Japan and in the U.S., where it owns an 83% stake in Sprint. SoftBank also owns a 36% shareof Yahoo! Japan -- though it controls 43% of its voting rights -- and mobile phone distributor Brightstar.
The company has also demonstrated a flair for increasing its value via acquisitions and direct investments. It parlayed a $20 millioninvestment in a then-unknow e-commerce start-up called Alibaba into a 30.25% stakein the Chinese tech heavyweight worth roughly $82 billion at its current stock price. Last year, Softbank paid $32 billion to acquire ARM Holdings,whose power-efficient semiconductor design is the standard for mobile devices worldwide. The company is also in the midst of raising a $100 billion technology investment fund.
With so many different growth drivers, it should come as no surprise that SoftBank's future seems bright indeed. Sell-side analysts estimate the company's profits will increase by 67% in the current year and grow at an average annual clip of 16% over the long term. SoftBank has also generally increased its dividend, although it hasn't done so each year since it initiated dividend payments in 2012. Income investors will want to keep an eye on the company's debt burden. Though the intensive fixed-asset nature of the telecom business usually involves a lot of debt, Softbank currently sports a debt-to-equity ratio of 490%. Taken in its totality, though, SoftBank certainly deserves the attention from income investors eyeing the international telecom market because of its mix of long-term revenue growth and increasing dividends.
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