The search for higher yields is driving the biggest rally in seven years for telephone stocks, as investors ignore some of the lowest profit forecasts in the MSCI World Index.
Verizon Communications Inc. and PCCW Ltd. are leading a 21 percent gain in MSCI’s gauge of 52 telecommunications companies from the end of the second quarter through Oct. 8 even as analysts estimate that the group’s earnings will grow at less than half the pace of the MSCI World measure of stocks in 24 developed nations, data compiled by Bloomberg show. U.S. phone shares are the most expensive industry in the Standard & Poor’s 500 Index relative to forecast profits, the data show.
With the MSCI World rising less than 4 percent in 2010 and corporate debt offering the lowest yields on record, investors are sacrificing the prospect of faster earnings growth for the current income of telecommunications stocks. Artemis Investment Management LLP, BlackRock Inc. and Fifth Third Asset Management Inc. are buying phone shares as dividends of companies from Royal KPN NV to AT&T Inc. yield more than their bonds amid signs that the U.S. economy is slowing.
“I know they don’t have earnings growth, but I am not buying them for growth but for their very high, abnormal dividend,” said Jacob De Tusch-Lec, a London-based fund manager at Artemis, which oversees $16 billion. “If I can see KPN paying 3 percent on their bond and giving me a dividend yield of 6 percent, why would I buy the bond?”
KPN’s Dividend
Phone stocks account for the biggest industry in De Tusch- Lec’s Artemis Global Income Fund, which can invest in stocks and bonds. Royal KPN NV, the largest Dutch phone company, pays a dividend of 6.38 percent. The Hague-based company issued 1 billion euro ($1.4 billion) bonds due September 2020 last month that yielded 3.75 percent, data compiled by Bloomberg show.
The MSCI World Telecommunication Services Index, which yields 5.31 percent, climbed 0.9 percent last week to extend its stretch of weekly gains to seven, the longest since February 2007. The MSCI World advanced 2.2 percent to 1,209.77 as lower- than-estimated U.S. hiring bolstered speculation that the Federal Reserve will buy more debt to stimulate the economy. It yields 2.50 percent.
The S&P 500 fell less than 0.1 percent to 1,164.81 at 9:51 a.m. New York time. The MSCI World Index advanced 0.1 percent, and the Hang Seng Index rose 1.2 percent.
Record Low
Concern that the recovery from the worst recession since the Great Depression is deteriorating has boosted demand for the safety of bonds and their fixed coupons. Yields on investment- grade U.S. corporate debt fell to a record low 3.56 percent last week, data compiled by Bank of America Corp. show.
The payouts on two- and five-year Treasuries also fell to all-time lows of 0.34 percent and 1.07 percent, respectively, as the Fed held its benchmark rate near zero since December 2008. The central bank bought about $1.73 trillion in government debt and mortgage securities in a 2009 program and $44 billion of Treasuries since the second round of buying began Aug. 17 to keep borrowing costs low and bolster the housing market.
Warren Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., said last week at a Fortune magazine conference that he “can’t imagine anyone” owning bonds after the drop in yields when they could purchase equities at cheaper valuations.
Higher Than Bonds
More than 65 companies in the S&P 500 pay dividend yields above the average interest rate on corporate debt, the highest number in at least 15 years, data compiled by Bloomberg and Charlotte, North Carolina-based Bank of America show.
“In this market environment people are a little bit more risk averse,” said Dan Hanson, a money manager at New York- based BlackRock, which oversees $3.2 trillion. “The value of dividends has been highlighted by the environment, and first and foremost is just the low yields on competing assets.”
Telephone companies account for 5 of the 10 largest dividends in the benchmark gauge for American equities and yield 5.45 percent as a group, based on data compiled by Bloomberg. As a group, utilities offer the second-highest payouts in the S&P 500 at 4.25 percent.
The 8.94 percent yield for Frontier Communications Corp., the Stamford, Connecticut-based phone company serving rural U.S. markets, is the largest in the index. Verizon, the biggest U.S. mobile carrier, has the eighth-highest at 5.94 percent.
AT&T, PCCW
AT&T, the largest U.S. phone company, has a dividend yield of 5.96 percent. The Dallas-based company’s bonds due January 2013 pay a coupon of 4.95 percent, Bloomberg data show.
PCCW, Hong Kong’s biggest phone company, has a dividend equivalent to 6.50 percent of its stock price and is likely to increase that to 6.90 percent next year, according to forecasts based on data compiled by Bloomberg. The Hong Kong-based carrier’s shares soared 51 percent this year through Oct. 8, exceeding the Hang Seng Index’s 4.9 percent advance.
MSCI’s gauge of global telephone stocks and the S&P 500 Telecommunications Services Index both posted their biggest rallies since 2003 last quarter, advancing 19 percent each. The surge has left U.S. phone stocks trading at an average price of 14.7 times estimated 2011 profits, the highest valuation of any industry group, data compiled by Bloomberg show.
Verizon’s 30 percent rise since the end of May has pushed the New York-based company’s share price to 14.4 times reported income, the highest level since June 2008. The carrier will have its biggest drop in earnings since 2003 this year, according to analysts’ estimates compiled by Bloomberg.
‘Emotional Reaction’
KPN shares have rallied 9.3 percent since the end of the second quarter even as analysts forecast that the Dutch company will post its biggest decline in profits since 2004 this year, according to data compiled by Bloomberg.
Investors in phone stocks “may be sacrificing 2 percentage points of growth potential,” said Bruce McCain, who oversees $25 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland. “It’s just an emotional reaction that they feel more comfortable with the higher yield.”
Telephone companies are the only S&P 500 group that analysts project will post a drop in third-quarter and full-year earnings. Profits slumped 8.1 percent in the July-to-September period and will decrease 4.2 percent for all of 2010, according to the average estimates in Bloomberg surveys. Earnings for the entire S&P 500 climbed 23 percent last quarter and will grow 35 percent this year, the data show.
Almost All Americans
Profits at telecommunications companies have declined as consumers eliminate home-phone lines in favor of mobile devices and voice service from cable providers. The industry also faces less demand from businesses and slowing growth from wireless phones given that there are enough mobile handsets for almost every person in the U.S., according to the CTIA, a Washington- based trade group.
“That’s why dividend yields for those kinds of companies is particularly important: They’re not high growers,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “Matured businesses that have stable and steady growth, though maybe not as strong growth, their dividend policy is becoming a more important feature for investors to look at.”
The potential for higher taxes in the U.S. may curb the appeal of dividend payouts, according to Holland & Co.’s Michael Holland. Lower tax rates for capital gains and dividends enacted under President George W. Bush in 2003 will expire in January unless President Barack Obama and Congress extend them.
‘Not a Positive’
“The uncertainty of what they’ll do is not a positive for stocks,” said Holland, who oversees more than $4 billion as the firm’s New York-based chairman. “The cliché is well warranted in this case that the market doesn’t like uncertainty.”
The S&P 500 has failed to exceed its 2010 high from April 23 as analysts cut 2011 earnings projections for the first time in more than a year last quarter. The forecast third-quarter growth rate is half the 49 percent and 52 percent increases during the prior two periods, data compiled by Bloomberg show.
While money has been pouring out of equity funds since May, investors are piling into exchange-traded funds that focus on dividends. U.S. dividend funds saw $1.54 billion in inflows last month and $5.27 billion for the first three quarters of the year, according to IndexUniverse.com, a San Francisco-based firm that tracks ETFs.
Investors put more money into the S&P 500’s dividend ETF last month than ever before, while the Dow Jones Industrial Average’s dividend ETF had its best month since January 2005, IndexUniverse.com data show.
“Most investors are very concerned about the U.S. economy,” said Masahiko Ejiri, senior fund manager at Mizuho Asset Management Co., which oversees the equivalent of $23 billion in Tokyo. “In that sense it’s reasonable for investors to want safe and high-yield investments, and telecom stocks are a good example.”
Verizon Communications Inc. and PCCW Ltd. are leading a 21 percent gain in MSCI’s gauge of 52 telecommunications companies from the end of the second quarter through Oct. 8 even as analysts estimate that the group’s earnings will grow at less than half the pace of the MSCI World measure of stocks in 24 developed nations, data compiled by Bloomberg show. U.S. phone shares are the most expensive industry in the Standard & Poor’s 500 Index relative to forecast profits, the data show.
With the MSCI World rising less than 4 percent in 2010 and corporate debt offering the lowest yields on record, investors are sacrificing the prospect of faster earnings growth for the current income of telecommunications stocks. Artemis Investment Management LLP, BlackRock Inc. and Fifth Third Asset Management Inc. are buying phone shares as dividends of companies from Royal KPN NV to AT&T Inc. yield more than their bonds amid signs that the U.S. economy is slowing.
“I know they don’t have earnings growth, but I am not buying them for growth but for their very high, abnormal dividend,” said Jacob De Tusch-Lec, a London-based fund manager at Artemis, which oversees $16 billion. “If I can see KPN paying 3 percent on their bond and giving me a dividend yield of 6 percent, why would I buy the bond?”
KPN’s Dividend
Phone stocks account for the biggest industry in De Tusch- Lec’s Artemis Global Income Fund, which can invest in stocks and bonds. Royal KPN NV, the largest Dutch phone company, pays a dividend of 6.38 percent. The Hague-based company issued 1 billion euro ($1.4 billion) bonds due September 2020 last month that yielded 3.75 percent, data compiled by Bloomberg show.
The MSCI World Telecommunication Services Index, which yields 5.31 percent, climbed 0.9 percent last week to extend its stretch of weekly gains to seven, the longest since February 2007. The MSCI World advanced 2.2 percent to 1,209.77 as lower- than-estimated U.S. hiring bolstered speculation that the Federal Reserve will buy more debt to stimulate the economy. It yields 2.50 percent.
The S&P 500 fell less than 0.1 percent to 1,164.81 at 9:51 a.m. New York time. The MSCI World Index advanced 0.1 percent, and the Hang Seng Index rose 1.2 percent.
Record Low
Concern that the recovery from the worst recession since the Great Depression is deteriorating has boosted demand for the safety of bonds and their fixed coupons. Yields on investment- grade U.S. corporate debt fell to a record low 3.56 percent last week, data compiled by Bank of America Corp. show.
The payouts on two- and five-year Treasuries also fell to all-time lows of 0.34 percent and 1.07 percent, respectively, as the Fed held its benchmark rate near zero since December 2008. The central bank bought about $1.73 trillion in government debt and mortgage securities in a 2009 program and $44 billion of Treasuries since the second round of buying began Aug. 17 to keep borrowing costs low and bolster the housing market.
Warren Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., said last week at a Fortune magazine conference that he “can’t imagine anyone” owning bonds after the drop in yields when they could purchase equities at cheaper valuations.
Higher Than Bonds
More than 65 companies in the S&P 500 pay dividend yields above the average interest rate on corporate debt, the highest number in at least 15 years, data compiled by Bloomberg and Charlotte, North Carolina-based Bank of America show.
“In this market environment people are a little bit more risk averse,” said Dan Hanson, a money manager at New York- based BlackRock, which oversees $3.2 trillion. “The value of dividends has been highlighted by the environment, and first and foremost is just the low yields on competing assets.”
Telephone companies account for 5 of the 10 largest dividends in the benchmark gauge for American equities and yield 5.45 percent as a group, based on data compiled by Bloomberg. As a group, utilities offer the second-highest payouts in the S&P 500 at 4.25 percent.
The 8.94 percent yield for Frontier Communications Corp., the Stamford, Connecticut-based phone company serving rural U.S. markets, is the largest in the index. Verizon, the biggest U.S. mobile carrier, has the eighth-highest at 5.94 percent.
AT&T, PCCW
AT&T, the largest U.S. phone company, has a dividend yield of 5.96 percent. The Dallas-based company’s bonds due January 2013 pay a coupon of 4.95 percent, Bloomberg data show.
PCCW, Hong Kong’s biggest phone company, has a dividend equivalent to 6.50 percent of its stock price and is likely to increase that to 6.90 percent next year, according to forecasts based on data compiled by Bloomberg. The Hong Kong-based carrier’s shares soared 51 percent this year through Oct. 8, exceeding the Hang Seng Index’s 4.9 percent advance.
MSCI’s gauge of global telephone stocks and the S&P 500 Telecommunications Services Index both posted their biggest rallies since 2003 last quarter, advancing 19 percent each. The surge has left U.S. phone stocks trading at an average price of 14.7 times estimated 2011 profits, the highest valuation of any industry group, data compiled by Bloomberg show.
Verizon’s 30 percent rise since the end of May has pushed the New York-based company’s share price to 14.4 times reported income, the highest level since June 2008. The carrier will have its biggest drop in earnings since 2003 this year, according to analysts’ estimates compiled by Bloomberg.
‘Emotional Reaction’
KPN shares have rallied 9.3 percent since the end of the second quarter even as analysts forecast that the Dutch company will post its biggest decline in profits since 2004 this year, according to data compiled by Bloomberg.
Investors in phone stocks “may be sacrificing 2 percentage points of growth potential,” said Bruce McCain, who oversees $25 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland. “It’s just an emotional reaction that they feel more comfortable with the higher yield.”
Telephone companies are the only S&P 500 group that analysts project will post a drop in third-quarter and full-year earnings. Profits slumped 8.1 percent in the July-to-September period and will decrease 4.2 percent for all of 2010, according to the average estimates in Bloomberg surveys. Earnings for the entire S&P 500 climbed 23 percent last quarter and will grow 35 percent this year, the data show.
Almost All Americans
Profits at telecommunications companies have declined as consumers eliminate home-phone lines in favor of mobile devices and voice service from cable providers. The industry also faces less demand from businesses and slowing growth from wireless phones given that there are enough mobile handsets for almost every person in the U.S., according to the CTIA, a Washington- based trade group.
“That’s why dividend yields for those kinds of companies is particularly important: They’re not high growers,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “Matured businesses that have stable and steady growth, though maybe not as strong growth, their dividend policy is becoming a more important feature for investors to look at.”
The potential for higher taxes in the U.S. may curb the appeal of dividend payouts, according to Holland & Co.’s Michael Holland. Lower tax rates for capital gains and dividends enacted under President George W. Bush in 2003 will expire in January unless President Barack Obama and Congress extend them.
‘Not a Positive’
“The uncertainty of what they’ll do is not a positive for stocks,” said Holland, who oversees more than $4 billion as the firm’s New York-based chairman. “The cliché is well warranted in this case that the market doesn’t like uncertainty.”
The S&P 500 has failed to exceed its 2010 high from April 23 as analysts cut 2011 earnings projections for the first time in more than a year last quarter. The forecast third-quarter growth rate is half the 49 percent and 52 percent increases during the prior two periods, data compiled by Bloomberg show.
While money has been pouring out of equity funds since May, investors are piling into exchange-traded funds that focus on dividends. U.S. dividend funds saw $1.54 billion in inflows last month and $5.27 billion for the first three quarters of the year, according to IndexUniverse.com, a San Francisco-based firm that tracks ETFs.
Investors put more money into the S&P 500’s dividend ETF last month than ever before, while the Dow Jones Industrial Average’s dividend ETF had its best month since January 2005, IndexUniverse.com data show.
“Most investors are very concerned about the U.S. economy,” said Masahiko Ejiri, senior fund manager at Mizuho Asset Management Co., which oversees the equivalent of $23 billion in Tokyo. “In that sense it’s reasonable for investors to want safe and high-yield investments, and telecom stocks are a good example.”
The following are the telephone stocks in the S&P 500 that had dividend yields higher than the average corporate bond payout as of Oct. 8: COMPANY YIELD Frontier Communications Corp. (FTR US) 8.94% Windstream Corp. (WIN US) 8.24% CenturyLink Inc. (CTL US) 7.30% AT&T Inc. (T US) 5.96% Verizon Communications Inc. (VZ US) 5.94% Qwest Communications International Inc. (Q US) 5.05%
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