Holly Cook: Traditionally the telecom sector has been seen as defensive, with solid dividends that were rarely cut. But during the most recent global recession, this turned out to not be the case in Europe. Morningstar's senior telecoms analyst Allan Nichols thinks the sector is starting to stabilise, however. He is not expecting a return to the days of ever-increasing revenue and margins but he does anticipate more dividend increases than cuts going forward.
So let's take a look at some of the most attractive companies in this sector.
The first stock that we are going to take a look at is Orange (ORA). Orange might not be the most attractive looking stock when you look at its economic moat, balance sheet strength or revenue growth. But it is one of the cheapest European telecom stocks, based on its current market price versus our fair value estimate.
The second company to take a look at is Vodafone (VOD). We expect Vodafone will continue to grow its dividend, not as fast as it has done where we have seen recent 7% annual growth rate, but something closer to a 3% annual dividend growth.
Next up is Telefonica (TEF). After canceling its 2013 final dividend, the firm returned this year with a renewed dividend, which immediately brought its yield back to 6.1%, making it the second highest yielding stock in the group. Due to this high yield we don't expect additional dividend increases for a while. The stock is, however, undervalued at the moment.
Finally, Telenor (TEL); Telenor has increased its dividend for five years and now yields 4.9% despite the stock also increasing nicely in price. We expect the firm's revenue growth rate to still be one of the highest in the sector and for its dividend to continue to grow.
In conclusion, we see the sector as stabilising and European telecom stocks now pay out in excess of 4% dividend on average. We still see plenty of opportunities for dividend-focused investors in this area.
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