Telecom Dividend Bubble Grows, But Euro-Telecom Players Create Caveats

We have recently warned about a dividend bubble that is inflating in the high dividend yield stocks like the telecom giants.  Both AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) are now under 5.0% due to significant share price appreciation.  These telecom giants are leveraged but we still think that the two companies can continue to raise their dividend payouts.  The problem with a bubble is that it can inflate and inflate.

There is something else to consider here.  It may sound like double-speak, but it has to brought up regardless of what we think at 24/7 Wall St.  European telecom giants make U.S. telecom giants look cheap.  Real cheap.  While we cannot expect a 50% gain or 100% gain in telecom giants based upon share price appreciation if Europe improves, the dividend yields in European telecom giants make the American counterparts look cheap.

Telefonica (NYSE: TEF) in Spain just cancelled this year’s dividend this week.  Spain is in the toilet and the company’s earnings are heading south. If you just typed in the ADR ticker you might think that you were going to get a 13% yield.  No more. At $11.35 its shares are now down more than 50% from the 52-week high in the ADR.

Vodafone Group PLC (NASDAQ: VOD) screens out with a 7% yield, but its most recent earnings were down 1%. At $28.67 per ADR traded in New York, its 52-week range is $24.31 to $29.28.  Vodafone has significant exposure to Europe and Eastern Europe.

In the last year we have also seen KPN, France Telecom, and Telekom Austria cut their dividends.  What happens if Euro-Zone worries keep growing?

And what about the ADRs of Telecom Italia S.p.A. (NYSE: TI)? Even after a 4% gain Friday to $8.20 in New York trading, its 52-week range is $7.31 to $13.60 and Yahoo! Finance advertises its dividend yield as being 5.7%.  Would you rather get close to 5% yields in AT&T and Verizon, or would you trust the Italian telecom giant to get through the woes of Italy unscathed for a meager 1% higher dividend? Maybe if you are stupid, or maybe if you really believe that Europe will get its house in order.

What about Portugal Telecom, SGPS S.A. (NYSE: PT)? AT $4.15 per ADR, its 52-week range is $3.73 to $8.77.  Does a dividend of 18% according to Yahoo! Finance sound right to you? Seeking Alpha recently showed that after its dividend cut that it still yields close to 9%.  Can you trust a 9% dividend yield from a country as shaky as Portugal?  Honestly?

Deutsche Telekom AG in Frankfurt’s local trading has a yield of 7.5%.  That yield is probably safe, but not if Europe itself goes into meltdown mode all over again.

On a dividend adjusted price basis, AT&T shares have risen 38.9% since the end of 2010. Verizon Communications has seen a gain of 36.7% since the end of 2010 on a dividend adjusted basis.  We have some questions here to consider… And people are just now getting interested in the dividend trade due to low rates?  We or were not interest rates already very low a year ago?

There is good news here, or at least news that is not so bad about this current dividend bubble.  We do not expect anything like a dot-com bubble burst that blew apart billions and billions of investors’ funds each and every day during the tech meltdown more than 10 years ago.

The other caveat here is that enough investor money could keep pouring into these dividend stocks.  The P/E ratios are getting high and we have more and more industry insiders warning of a dividend premium getting too high.  Verizon and AT&T are already worth about $340 billion already in combined market caps.

JON C. OGG