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With telcos, no need to stick close to home

When we want access to a thousand television stations, there's usually not a whole lot of choice when it comes to picking a provider. We invariably turn to one of our local telecommunications companies, grumble about the service and pay our bills.

But when it comes to investing in a telecommunications company, why stick so close to home? There are big benefits to investing in an international company, and we're not just talking about geographic diversification.

Canadian stocks in this sector have enjoyed a good run recently, as initial fears about rising competition in their fast-growing wireless divisions have died down a little. Rogers Communications Inc. has risen about 10 per cent this year, BCE Inc. has risen 6 per cent and Telus Corp. has risen nearly 13 per cent - all well above the 1 per cent dip for the S&P/TSX composite index.

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The gains have left their yields looking, in some cases, less than impressive and valuations are a little on the high side. But hop over the border and the situation is different. In the United States, telecommunications companies have been ignored in favour of glitzier stocks that have a closer connection to the hoped-for economic recovery.

As a result, share prices are low, valuations are cheap and yields are dazzling. AT&T Inc. shares have fallen 13 per cent this year, giving them a trailing price-to-earnings ratio of about 11 and a yield of 6.9 per cent. Similarly, Verizon Communications Inc. shares have fallen fallen 18 per cent, sending the P/E below 12 and the yield to 7 per cent.

Add in the potential benefits of buying U.S. stocks at a time when the Canadian dollar trades at about 95 cents (U.S.), and these companies are hard to ignore. (Full disclosure: I own shares in Telus and Verizon.)

To be sure, the recent quarterly earnings from Verizon and AT&T were mildly disappointing and wireless penetration in the United States is high, leaving less opportunity for growth in this particular area.

However, both companies recorded big (though controversial) one-time charges related to new U.S. health-care legislation. As well, both are spending billions of dollars on upgrades to their fibre-optic and wireless networks, to give them some competitive heft.

Once these upgrades are completed, the hope is that their respective levels of free cash flow will surge, giving them more flexibility to raise their dividends or buy back shares.

That's not a sure thing, of course, and there are doubters. But the uncertainty makes these stocks far more compelling now than they will be when everyone agrees that they are rock solid.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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