The 7.7% Yielder Trading At A Discount

Michael Vodicka's picture

Friday, March 6, 2015 - 10:00am

by Michael Vodicka

With interest rates near 0% and traditional income investments, like savings accounts and certificates of deposits (CDs), earning next to nothing, blue-chip telecom stocks like AT&T (NYSE: T) and Verizon (NYSE: VZ) have become wildly popular.

That makes sense. Telecom is a "recession-proof" industry. Regardless of what's happening with the economy, people will still need cell phones and cable TV. And with both stocks yielding around 5%, they look like a good choice for income investors in search of high yields.

But there's a problem. As with a lot of American blue chips, these stocks look expensive right now. AT&T and Verizon sport price-to-earnings, or P/E, ratios of 29 and 21, respectively -- well above the S&P 500s historical average of 15.

And while a 5% dividend yield might seem like a lot, in the telecom industry, you can find much higher yields... and at a much better price.

For example, I've found a telecom that's currently yielding 7.7%. It enjoys the same competitive advantages as both AT&T and Verizon, and better yet, it's trading at a P/E ratio of less than 12, making it a much better value than AT&T or Verizon.

But you've probably never considered this company. In fact, I doubt you've ever heard of it.

That's because the company -- Telefonica Brasil (NYSE: VIV) -- isn't based in the United States. But before you dismiss this as just another "risky foreign stock," hear me out...

As one of two Brazilian fixed-line operators, Telefonica Brasil is one of the largest players in the business. The company has 15.31 million fixed-line clients, 3.92 million broadband users and 641,000 pay-TV subscribers.

In fact, not only does the company dominate both the fixed-line and broadband businesses, but with its recent acquisition of Vivo Wireless, Telefonica is now the largest wireless operator in Brazil.

Due to the company's size, it's unlikely that this stock will provide blockbuster growth. But with a current net margin of 14%, the company is solidly profitable. By comparison, both AT&T & Verizon sport net profit margins of less than 8%.

Now to be fair, Telefonica Brasil has sold off recently after the Brazilian government announced its intention to lower certain fees wireless communication companies can charge. In response to the threat of heightened regulation, the stock has pulled back roughly 10% since July. And that decline came on the heels of another drop in the shares earlier this year. All told, shares of VIV are now trading 34% below their highs from early 2012.

This big pullback has given investors a great buying opportunity...

Telefonica Brasil now sports a P/E ratio of 11.9... well below the industry average of 19.7.

And as I showed you a moment ago, Telefonica Brasil is already much more profitable than its U.S. counterparts. So even though its margins may fall as the government puts pressure on the industry to lower fees, I'm confident Telefonica's margins will remain head and shoulders above AT&T's and Verizon's.

And if you're investing in Telefonica in search of big yields, then you can rest easy. With a dividend payout ratio of just 79%, the company can afford to take a hit to its bottom line and still keep up its dividend payments. Put in context, Verizon's payout ratio is 88% and AT&T's is a staggering 155%.

So even with the new regulations, I think Telefonica Brasil -- and its 7.7% dividend -- are safe.

Of course with investing, nothing is 100% certain. In fact, Brazil has its share of challenges. And although telecoms are one of the safest sectors of the market, shares could be subject to another pullback if the Brazilian economy falters.

That's why I currently rate Telefonica Brasil as a "hold" in my High-Yield International portfolio.

But with a 7.7% yield, it just goes to show you that when it comes to income investing, you don't have to settle for the below average yields offered by American equities.

There are hundreds of other foreign blue chips -- just like Telefonica Brasil -- that are paying much higher yields than U.S. companies. And better yet, most of them trade at more attractive valuations.

So if today's low interest rate environment has you starved for higher yields, then it's time to start looking at foreign markets.

On average, foreign companies tend to pay higher dividend yields than their U.S. counterparts. Don't believe me? Consider this... Out of 239 companies that pay dividend yields over 12%, only 60 of them are located in the United States. To see a list of the highest-paying stocks, or to learn more about investing in international dividend payers, follow this link.
 

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.