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Buy 4 Non-U.S. Mobile Operators with Strong Growth Potential

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One of the key attributes of the telecommunications industry is that it is a major infrastructure product for both emerging and developed nations. The telecommunications industry benefits from an improving global economy, which makes the overall macro-outlook buoyant.  

Wireless Is the Key

Wireless networks hold the key to growth of the overall telecom industry. Wireless network standards are continuously evolving worldwide in order to provide faster speed. Long-Term Evolution (LTE), the most sought after super-fast (4G) wireless communications technology, is fast gaining momentum. Following significant deployment of 4G LTE networks, LTE-A (Long-Term Evolution Advanced) wireless networks are gradually finding a solid foothold.

Carrier aggregation is the most important part of the LTE-A technology as it allows wireless operators to create large spectrum assets by combining different frequency bands. LTE-A also incorporates several technological advancements such as Coordinated Multi-Point, Self-Optimizing Networks, Small cell enhancements, Enhanced Inter-Cell Interference Coordination and Advanced Multi-Input Multi-Output antenna.

According to a research report published by Ovum for industry association 5G Americas, the connections have reached 2.37 billion globally at the end of the first half of 2017. This indicates an improvement of a whopping 59% year over year. Per the report, LTE connections will continue to rise to 2.5 billion in 2017, 3 billion in 2018 and will eventually reach 4.9 billion in 2022. At this rate, 4G LTE is set to outnumber 3G (all forms of 3G technologies) subscribers globally by 2020. By the end of 2021, global LTE market share will cross 53%.

Upcoming 5G Wireless Network

Fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for U.S. wireless carriers. Per a report by research firm iGR, U.S. telecom operators will spend around $104 billion between 2015 and 2025 to upgrade their existing 4G networks to the upcoming 5G standards and thereafter, execute full installation of 5G wireless services.

We expect wireless networks to provide the primary impetus to the telecom industry. In this regard, Internet of Things (IoT) has the potential to emerge the numero uno factor for future growth in the space. According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT will grow at 19.2% compound annual growth rate to nearly $1.7 trillion in 2020 from $698.6 billion in 2015.

Growing Demand for Fiber Optic Network

Fiber optic cable is a vital infrastructure in order to meet the growing need for cloud-based business data, along with more video-streaming services by individuals. Moreover, fiber-optic cable network is vital for backhaul and last mile local loop, which are needed by wireless service providers for their upcoming 5G network.

Dark fiber provides abundant bandwidth which is of utmost necessity for the smooth functioning of super-fast wireless networks such as 4G and 5G. Dark fiber based wireless backhaul provides scalability and efficiency to bandwidth management. This will eventually lead the company to significantly reduce its backhaul costs.

Fiber networks are essential for the growing deployment of small cells. The increase in adoption of small cells is because of the inconvenience in installing large towers in inaccessible areas.

Momentum Likely to Continue

Huge government expenditures, including those on U.S. broadband infrastructure development program and similar structural subsidies in China and India, have been a boon to telecom service providers. However, the major thrust for the telecommunications sector is coming from within the industry as a result of continuous network and product upgrade and inventions by industry players.

A growing global economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. This in turn has given a boost to the demand for telecom infrastructure developers, particularly wireless equipment manufacturers.

Moreover, given that the global economy is growing steadily, supported by strong data of various macro-indicators, many large wireless operators are likely to generate massive cash. However, because of their size, they may not have the growth opportunities they once had. For that reason high dividend-yielding companies will also be attractive for investors.

Our Pick

At this stage, we believe investors should choose stocks which promise strong dividend yield and carry a favourable Zacks Rank to cash in on the future growth that 4G LTE and upcoming 5G network offers. We present four such stocks here, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

America Movil S.A.B. de C.V. (AMX - Free Report) : Based in Mexico City, Mexico, America Movil is the largest telecom operator in Mexico. Its operating segment comprises Wireless, Fixed Line and Others. The company has a long-term (three-five years) earnings per share (EPS) growth estimate of 55.87% and a dividend yield of 0.98%.

TIM Participacoes S.A. : Based in Rio de Janeiro, Brazil, TIM Participacoes is the largest GSM wireless service provider of Brazil, in terms of subscribers and revenues. TIM Participacoes has a long-term (three-five years) EPS growth estimate of 23.50% and a dividend yield of 0.80%.

Telefonica Brasil S.A. (VIV - Free Report) : Based in Sao Paulo, Brazil, Telefonica Brasil is a leading provider of wireless voice and data and pay-TV service in Brazil. Telefonica Brasil has a long-term (three-five years) EPS growth estimate of 12.65% and a dividend yield of 6.09%.

BCE Inc. (BCE - Free Report) : Based in Verdun, Canada, BCE is the leading integrated telecom service provider in Canada. The company offers various types of wireless, wireline and satellite TV services. BCE has a long-term (three-five years) EPS growth estimate of 3.50% and a dividend yield of 4.96%.

Solid Chart

The chart below shows that all the above-mentioned stocks have performed well in the last one year.



Bottom Line

The global telecommunications industry is witnessing rapid technological improvement. Unprecedented growth in high-speed mobile Internet traffic, particularly with respect to wireless data and video, has transformed this industry into the most evolving, inventive and keenly contested space. At this stage, we believe that these four stocks with a favorable Zacks Rank, high dividend yield and significant growth potential are poised to capitalize on the growing opportunities.

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