Market Wrap-up for Mar. 24 – Why We’re Bullish on Telecom Giants (T, VZ)

Over the past couple of years, telecom giants like AT&T (T) and Verizon (VZ) have been largely left out of the wider market’s massive bull run. Here’s four reasons why we believe these stocks are now poised to outperform over the next several years.

1. Yield Matters

Pop quiz: name the top two highest-yielding stocks in the Dow 30. If you said AT&T (5.4% yield) and Verizon (4.5%), you’re a winner.

Now for a much tougher question: name the third highest-yielding Dow 30 stock. No, not General Electric (GE), although GE’s 3.47% yield is close. Believe it or not, tech giant Intel (INTC) is the third highest-yielding Dow component, at 3.58% – almost a full percentage point behind Verizon, and nearly two percentage points below AT&T.

The combination of near record-low interest rates and a lack of true high-yield blue chip names means T and VZ should be a part of any long-term portfolio right now.

2. The Only Bargains Left?

The average P/E (price-to-earnings) ratio for the S&P 500 is around 20, which is pretty high, considering the historical average is around 15. AT&T’s fiscal 2015 P/E? 12.5. Verizon’s? 12. Below average valuations and well above average yields? Sign me up.

With reasonably-priced stocks hard to come by these days, investors should be flocking to these two telecom giants. And when the markets do finally post some long overdue pullbacks, T and VZ will look even better, since investors tend to target safe-haven plays during times of uncertainty.

3. A Wireless, Connected Future

Unlike major tobacco names, which offer similar yields to T and VZ, the telecom industry as a whole still has plenty of growth ahead of it. Any tech expert worth his or her salt will tell you that the days of physically wired infrastructure build-outs are almost over – the future is in wireless, and AT&T and Verizon are at the forefront of it.

What’s more, the proliferation of streaming online media (Netflix et al) means consumers will be even more dependent on Internet Service Providers (ISPs) than ever before. Sure, cable revenue has probably already topped, but the need for fast, reliable Internet access continues to grow in spades – especially in the mobile arena, which T and VZ have a firm control over.

4. A Renewed, Legal Monopoly

Back in 1982, a trust-busting Department of Justice forced AT&T to split up the Bell System into seven regional entities called Baby Bells. Guess what’s happened since then? AT&T and Bell Atlantic (later known as Verizon) eventually just re-acquired nearly all the Baby Bells. When traditional landline phone service became passe, and wireless took over, AT&T and Verizon again asserted their dominance, making key acquisitions and becoming the dominant major carriers in the U.S., controlling nearly two-thirds of the market (if regulators hadn’t blocked T’s recent takeover bid for T-Mobile, that total would be even higher).

Disrupting AT&T and Verizon’s hold on the telecom sector is a very tall order, and quite frankly isn’t even a concern for the foreseeable future.