Despite Gains, 4 Big Dividend-Paying Telecom and Utility Stocks Are Still Buys

By Lee Jackson Updated Jan 13, 11:51AM EST · Published Mar 17, 8:25AM EDT

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Despite Gains, 4 Big Dividend-Paying Telecom and Utility Stocks Are Still Buys — © Thinkstock

In a year when almost every sector is still mired in negative performance, or flat at best, the telecom and utility sectors have posted double-digit gains. Despite analysts’ end-of-the-year warnings that both sectors would not be good plays because of the potential for rising interest rates, both sectors have been on fire.

The question for investors is simple: Can the sectors keep going, or should profits be taken? With the Federal Reserve still very nervous on the economy, many strategists think only one more rate increase is in the cards, and with the yield on the long Treasury bond at the same level it was last year, the top telecom and utility stocks could still have legs going forward.

We screened the Merrill Lynch research database and found four companies rated Buy that investors could still add to portfolios at current levels.

AT&T

This company will continue to serve customers regardless of where oil or the Chinese yuan trade, and it is on the Merrill Lynch US 1 list. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries.

In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions. With shares trading at a very cheap 12.5 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.

While fourth-quarter earnings were in line with forecasts, and slightly below the Wall Street estimates, a change in accounting for the entertainment group lowered revenue/EBITDA by $300 million for the quarter. Merrill Lynch noted that this knocked three cents per share off the bottom line numbers. All in all, a solid quarter, and another reason for conservative accounts to own the stock, especially with solid DirecTV adds and mid-single-digit earnings growth estimated for the balance of 2016.

Some analysts now expect the company to become the biggest user of OpenStack cloud computing software worldwide as it expects to build out its private cloud to 500,000 nodes (servers) and span across hundreds of data centers. OpenStack helps corporate IT departments manage data centers packed with computer servers. Rackspace Hosting and government space agency NASA co-developed OpenStack in 2010, aiming to make the software a cloud computing standard.

AT&T investors receive a huge 4.95% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus price target is $37.85. Shares closed Wednesday at $38.77.
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Entergy

This higher yielding utility was recently upgraded and makes the buy list at Merrill Lynch. Entergy Corp. (NYSE: ETR) is an integrated energy company engaged primarily in electric power production and retail distribution operations. It owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including nearly 10,000 megawatts of nuclear power, making it one of the nation’s leading nuclear generators. Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy has annual revenues of more than $12 billion.

Many analysts like the position of the company’s plants, as they supply some of the petrochemical industry along the Gulf Coast. Petrochemical plants and liquefied natural gas export facilities are springing up all across the central Gulf coast. For the petrochemical industry, the boom is driven by demand, not supply, and so the current lower gas prices actually help this growth trend, which has been a solid revenue silo for Entergy.

The company posted very solid earnings recently, and the guidance for the rest of the year was very good despite some concerns over industrial sales. With a higher dividend than many of its peers, the company can be bought and put away for the long haul.

Entergy investors receive a 4.36% dividend. Merrill Lynch has an $80 price target, and the consensus target is $74.63. The stock closed Wednesday at $78.02.
Frontier Communications

This rural local exchange carrier really expanded service recently. Frontier Communications Corp. (NASDAQ: FTR) offers broadband, voice, video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for residential customers, small businesses and home offices and advanced business communications for medium and large businesses in 28 states. Wall Street analysts note that the company has taken broadband share in almost 80% of operating markets last year.

The company got final approval in May of last year for an $8.5 billion acquisition of Verizon’s wireline operations that were providing services to residential, commercial and wholesale customers in California, Florida and Texas. The Verizon assets are expected to be accretive and help the company grow free cash flow, and they could help the company begin to grow the dividend again. In addition, the government’s CAF-II plan to increase broadband access in rural areas should help boost sales and EBITDA slightly.

Frontier investors receive an outstanding 7.87% dividend. The $9 Merrill Lynch price target is higher than the consensus estimate of $6.11. Shares closed on Wednesday at $5.34.

PPL

This utility posted inline fourth-quarter earnings, but came in a little light on the revenue side. PPL Corp. (NYSE: PPL) serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties, as well as 543,000 customers in 77 Kentucky counties and five counties in Virginia. The company also provides electric delivery services to approximately 1.4 million customers in Pennsylvania, and it operates electricity distribution network for the Midlands, South West, and Wales in the United Kingdom.

In addition, PPL offers a range of customer-care and back-office services to competitive retail energy suppliers, including customer enrollments; contract management; electronic data exchange; simple and complex billing; and call center operations comprising telemarketing, payment processing and collections of overdue accounts.

The company is one of the leading utility companies in the United States that plans to continue to increase regulated operations and lower earnings volatility attached to competitive operations. PPL raised cash and lowered debt late last year by selling some hydroelectric assets to NorthWestern energy.

Investors receive a 4.12% dividend. The Merrill Lynch price target is $39. The consensus target is $37.90. PPL closed Wednesday at $36.93.
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Investors looking to buy these top dividend yielding companies may want to scale buy shares. Buy a one-third position now and look for the market to back up some. While these usually don’t trade down much with the market, scaling in capital still might make sense.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.