What Telecom Investors Need to Watch This Earnings Season
With Alcoa reporting last night, earnings season is formally upon us. Yet telecom's earnings season might not have the same make-or-break feel as other sectors. Since 2008, the telecom sector of the S&P 500 has been extremely stable relative to its peers.
Source: Standard & Poor's.
At the depths of the financial crisis, the worst quarter from the telecom sector saw earnings slide only 28% off their 2008 high point. In addition, the coming quarter is expected to be only about 16% above the lows seen in late 2009.
For context, the information technology sector has bounced 183% off its earnings low point seen in late 2008. Its decline was also more precipitous heading in to the recession: Between the third and fourth quarter of 2008 alone, the IT sector saw a 38% drop in profits.
With that in mind, let's look at what to expect from the telecom industry as earnings reports roll in over the next month. Here are eight of the most-watched telecom companies, ordered by their estimated earnings release date.
Q3 Earnings Estimates 90 Days Ago
|AT&T (NYS: T)||Oct. 20||$0.61||$0.60||$0.55|
|Verizon (NYS: VZ)||Oct. 21||$0.57||$0.58||$0.56|
|Alaska Communications (NAS: ALSK)||Oct. 26 to Oct. 31*||$0.12||$0.10||($0.07)|
|American Tower (NYS: AMT)||Oct. 31 to Nov. 4*||$0.25||$0.25||$0.23|
|CenturyLink (NYS: CTL)||Nov. 2||$0.33||$0.65||$0.83|
|Frontier (NYS: FTR)||Nov. 3||$0.06||$0.07||$0.08|
|Windstream (NAS: WIN)||Nov. 4||$0.20||$0.20||$0.18|
Sources: Yahoo! Finance and Earnings.com.
*Company has yet to set a formal earnings-announcement date. Earnings are expected within this window of time.
Although the telecom sector is a place of relative stability, that doesn't mean this earnings season doesn't have any areas to watch. For instance, the grouping of rural-focused telecoms are all digesting major acquisitions and have been absolutely hammered in recent months.
The likely culprit for the industry's fall is that investors are getting nervous that a frozen credit market could adversely affect these companies' ability to pay their dividends. Take Frontier, for example. The company had to use a healthy dose of debt to finance its purchase of Verizon assets that nearly tripled the company's size. That has left the company with about $8 billion in net debt in total and $1.69 billion maturing between now and 2014.
In a healthy market, rolling that debt over wouldn't be a problem. However, panic is ruling the market and investors are increasingly looking at worst-case scenarios. Frontier is expecting $1.1 billion in free cash flow this year against dividend payouts of $746 million. That's a 67% payout ratio on cash flow -- doable, but toward the upper range of payout ratios.
So watching cash flow and seeing whether any comments are made about macro issues threatening dividends will be especially important this quarter. What else should investors be watching?
- Acquisitions: Investors will get an update not only on Frontier's cost savings from its Verizon acquisition, but CenturyLink will also be able to talk more about how its integration of Qwest is proceeding.
- Subscriber numbers: Among the larger wireless carriers, both AT&T and Verizon will be releasing their latest subscriber counts. Always interesting is data-revenue growth, as is seeing whether the two companies can continue consolidating their lead among contract subscribers.
- Forward-looking statements: Infrastructure plays to the telecom sector, such as Alcatel-Lucent (NYS: ALU) and even fiber-optic component suppliers like JDS Uniphase (NAS: JDSU) , have been absolutely crushed across the summer as telecoms reined in spending. If there are positive forward-looking statements from the sector that spending is moving forward, that could open up opportunities to invest in companies supplying the industry.
That's it for this telecom earnings season preview. Investors often look at the telecom sector for one simple reason: dividends. If you're on the quest for great new dividend stock ideas, I invite you to take a look at the dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.
At the time this article was published Eric Bleeker owns shares of no companies listed above. You can follow him on Twitter to see all of his technology and market commentary.Motley Fool newsletter serviceshave recommended buying shares of AT&T and American Tower. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.