As expectations of a fall in interest rates, shares that pay dividends become attractive again.
According to the pricing of futures contracts, the market expectation is that the top segment of the fund scores will fall from the current 2.5% to 1.5% in 2021. From June 10, the market reflected a probability of 98.1 % of a species cut by the end of 2019, according to Bloomberg data.
As a result of these moderate expectations, the yield on the US government bond has fallen to 2.42%, a sharp reversal since six months ago when it was trading around 3%. In contrast, the dividend yields of the two largest telecom companies in North America are AT & T (NYSE 🙂 and BCE Inc. (NYSE :), worth looking at: AT & T & # 39; s annual dividend yield is just over 6%, while BCE, Canada & # 39; s largest telecom operator, yields more than 5%.
These returns appear to be very attractive in the current tariff environment and offer more than three times the yield of safe-haven government bonds. But before you make that decision, you need to find out if these investments are safe. Let us take a deeper look:
AT & T – Caught in Debt-Based Growth
If we look at the AT & T price chart, it is clear that investors have a problem with the business direction of the company. Its shares have lost more than 15% in the last two years in a highly volatile trade pattern. The shares closed yesterday's session at $ 32.18. The benchmark has risen more than 18% in the same period
AT & T is rushing to become a modern media giant at a time when consumers are cutting cables and subscribing to cheaper entertainment options such as Netflix (NASDAQ :). To survive in this disruptive environment, the company bought Time Warner last year, with popular content assets such as HBO and CNN, for $ 85 billion.
But that acquisition brought AT & T's debt under control and caused operational complications. AT & T has a net debt of $ 169 billion and says that 75% of the debt it bought to buy Time Warner will be paid off by the end of this year.
AT & T & # 39; s 6.67% forward dividend return clearly indicates that the market sees some sort of austerity on its dividend gain of $ 15 billion, now $ 0.51 per share, if the company's turnaround plan fails.
BCE – A stable Canadian giant
BCE has a strong dominant position in Canada & # 39; s highly regulated telecom market, where three major players generate the most revenue. Through its diversified service offering, including wireless internet, home use and media company, BCE has shown continued growth in its subscribers. The operator has made the right bets over the past five years, which has helped the company achieve a better return for its shareholders.
One of the few measures that will fuel future growth is his investment, worth billions of dollars, on his fiber optic network to support faster internet speeds and to prepare the tool to offer 5G: the next generation of wireless network technology
Unlike At & T, the BCE shares have continued their slow and steady upward movement and this year 18%. His shares closed at $ 46.88 on Wednesday.
BCE has long pursued a policy of increasing the dividend by 5% per year and has used a number of acquisitions to partially fuel the growth of cash flow needed to continue to stimulate the payout. The recent acquisition of Manitoba Telecom Services in 2017 was one of those steps that began to improve both top and bottom-line profitability.
According to the company's dividend policy, the company divides between 65% and 75% of its free cash flow into payouts. In accordance with this policy, BCE has more than doubled its annual payment since the fourth quarter of 2008; the payout is now $ 2.37 per share per year, which translates into a dividend yield of just over 5%.
Bottom Line
In general, telecom companies are large investments for investors in buy-and-hold who strive to earn a steadily growing income. These companies are not too volatile when markets go through an uncertain period, especially since their services are among the last that people would consider cutting into a recession. And that stickiness ensures stability in their cash flows, making them perfect income stocks.
Between AT & T and BCE we prefer the latter because of the stability of the share price and the low debt. Although AT & T has a very attractive return, it is too big a battlefield for conservative investors to deal with after the mega deal with Time Warner and the risky balance sheet.
