Tech and Telecom Stocks Merrill Lynch Rates Buy That Yield 4% to 8.5%

Investing

Published: July 8, 2016 10:50 am

Last Updated: January 13, 2020 5:57 am

With the market starting to look very fully valued, and yields at record lows despite howls from pundits they were going higher, what are income and growth investors to do now? Selling and going to cash is not easy for most investors as the commission aspect always looms. One good idea is to look for stocks that pay solid and consistent dividends.

One area that has been beaten down, especially over the last couple of months is technology, and while the telecom sector has performed much better, there are still some very compelling companies to buy that pay outstanding dividends.

We screened the Merrill Lynch research universe and found five tech and telecom stocks yielding more than 4%. All are rated Buy.

AT&T

After an outstanding first quarter from a stock price standpoint, this stock could be poised to go higher. 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 its shares trading at a very cheap 14.3 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.

Last week Merrill Lynch reiterated its Buy rating on AT&T, along with a $46 price objective, raised from $42 in that call. That report was a post-Brexit investing theme with other companies with minimal exposure to the European and Brexit woes. They noted:

Analyst David Barden is raising his price objectives on AT&T (from $42 to $46) and Verizon (from $55 to $59). The price objectives are based on relative multiples versus the S&P 500 of 0.96x and 0.92x. The target relative multiples are based on the premium investors historically have paid for the relative fundamental stability and yield AT&T and Verizon offer during periods of economic and political uncertainty. The Brexit vote result was an unexpected event that has had immediate and will likely have lasting effects on sentiment. The upcoming US election only adds to uncertainty that could drive a continued flight to quality.

AT&T investors receive a 4.54% dividend. The Merrill Lynch price target for the stock is $46, and the Thomson/First Call consensus target is $39.56. Shares closed Thursday at $42.30.

Frontier Communications

This is a rural local exchange carrier that Merrill Lynch has remained positive on. 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. Its approximately 17,800 employees are based entirely in the United States. Wall Street analysts note that the company has taken broadband share in almost 80% of operating markets last year.

The company’s $8.5 billion acquisition of Verizon’s wireline operations that were providing services to residential, commercial and wholesale customers in California, Florida and Texas are a huge difference maker when it comes to the Merrill Lynch 2016 and 2017 estimates. The analysts increase 2016 EBITDA numbers from $2.129 billion to $3.751 billion. The 2017 EBITDA numbers go from $2.121 billion to $4.308 billion. The company is expected to report earnings in early May. The analysts also feel that company will be generating cash flow to cover the large dividend by more than two times.

The company reported a better than anticipated first-quarter EBITDA number and guided in line to ahead of Wall Street estimates on post-Verizon deal cash flow. Frontier is the highest yielding non-energy component in the S&P 500.

Frontier investors receive a huge 8.55% dividend. The massive $9 Merrill Lynch price target compares with the consensus target of $6.27 and the most recent close at $4.91.
Garmin

This stock fell out of the limelight and could be poised for a solid comeback. Garmin Ltd. (NASDAQ: GRMN) designs, develops, manufactures, markets and distributes a range of navigation, communication and information devices worldwide. It operates through five segments: Auto, Aviation, Marine, Outdoor, and Fitness. While the growth of smartphone GPS put a crimp in the company’s business, the expansion into new products is proving successful.

The company has no debt and boasts cash of over $1 billion, or $5.50 a share. There’s some frustration that it hasn’t been more aggressive in repurchasing shares, given its strong balance sheet. That could change if activists take aim at Garmin, which is chatter that has been heard on Wall Street for years.

Garmin investors receive a 4.8% dividend. Merrill Lynch has a $47 price objective. The consensus target is $42.75. Shares closed at $42.59.

Qualcomm

This top tech stock has totally underperformed this year and also resides on the Merrill Lynch US1 list of top picks. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies and develops, designs, manufactures and markets digital communications products and services in China, South Korea, Taiwan the United States, and internationally.

The growth of 3G mobile technologies in emerging markets, like China and India, has had a positive impact on Qualcomm and could be a difference maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come. The company signed numerous big licensing deals recently in China that gave the stock a solid boost.

Qualcomm posted solid fiscal second-quarter numbers that beat estimates, but the forward guidance was tepid. While Merrill Lynch team see some potential share loss at Apple, they think a resolution with LG could offset the loss.

Qualcomm shareholders receive a 4.01% dividend. The $65 Merrill Lynch price target is well above the consensus target of $56.69. The stock closed Thursday at $52.93.

Vodafone

This European telecom company tends to fly under investors’ radar and it makes very good sense now. Vodafone Group PLC (NASDAQ: VOD) has been scorched since the middle of May, in part because of the Brexit, and offers a solid entry point here. The company offers voice, messaging and data services across mobile and fixed networks; broadband and TV services; cloud and hosting, as well as internet protocol-virtual private network services; roaming services; and unified communications services.

It also provides M-Pesa, a mobile money transfer and payment service, and Vodafone One, an ultra-high-speed fixed broadband service with Ono Fibre, home landline, 4G mobile telephony and Vodafone TV.

In addition, Vodafone offers Internet of Things products, which includes communication between devices via mobile technologies; international voice transit and roaming; carrier services, such as fixed and mobile connectivity and other services; and smartphones and tablets. The company serves 462 million mobile, 13 million fixed broadband and 9.5 million TV customers. It sells its products primarily through branded stores, distribution partners and third party retailers.

Vodafone shareholders receive a 5.48% dividend. The Merrill Lynch price target is $37.46. The consensus is at $38.23, The shares closed at $29.61.

These companies trade well off the highs printed last year, and all have solid upside potential. They are more suited for aggressive growth accounts that can tolerate volatility.