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Why Buy Strategy is Apt for Telephone and Data Systems Now

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We issued an updated research report on leading regional wireline voice and video service provider, Telephone and Data Systems Inc. (TDS - Free Report) , on Sep 11.

The Telephone and Data Systems stock has performed impressively in the last six months.Shares of Telephone & Data Systems have registered a positive return of 4.3% compared with the industry’s gain of 3.9%, in the said time period.

What’s Driving the Stock’s Performance?

Telephone and Data Systems is experiencing strong smartphone demand at its wireless wing – U.S. Cellular Corp. (USM - Free Report) . Of the total smartphone sales, nearly 94% are 4G devices. The addition of iPhone and other branded mobile phones like Samsung Note series are driving the company’s revenues. We believe that the long-term higher ARPU from smartphone users and full utilization of LTE network capacity on the back of migration of customers from 3G to 4G networks are expected to mitigate operating cost headwinds arising from higher subsidies on smartphones. Further, the device installment plan is expected to offset losses from smartphone subsidies.

Launch of Shared Data plans for consumers and businesses at nominal prices should help the company gain consumers. Moreover, Telephone and Data Systems continues to expand its business in the managed hosting and cloud service market through a new cloud-based storage service and managed IP connections.

Telephone and Data Systems is looking for lucrative opportunities to bring more fiber in order to better address services, both in its current footprint and adjacent areas. By leveraging on fiber, the telco is trying to respond to customers' growing TV and broadband service demand.

The company recently signed an agreement to acquire Mead, CO-based K2 Communications LLC., a provider of broadband, video and voice products to residential customers. If this merger is completed, then it will add more than 1,200 service addresses to the company’s wireline subsidiary, TDS Telecommunications Corporation (TDS Telecom) and will be the fourth acquisition in 2017. Earlier this year, the companyinked a deal to acquireCrestview Communications and has completed the purchase of Sun Prairie Utilities and InterLinx Communications. All these acquisitions have strengthened the company’s fiber-based broadband networks. Such strategic moves highlight the company’s efforts to diversify its business model from a telecom service provider to fiber provider.

At the end of the reported second-quarter 2017, the service provider claimed to have expanded about 19% of its network route miles with fiber. The telco’s fiber network investments are also driving positive results in consumer services like Internet Protocol TV (IPTV). Its IPTV connections grew 12.1% year over year to 46,200 with a net addition of 5,000 connections compared with the prior-year figure. Additionally, the service provider is witnessing more customers opting to purchase higher speeds, including 1 Gbps, in its FTTH-enabled markets.

Dividend Payments

We appreciate Telephone and Data Systems’ decision to reward its shareholders with a third-quarter 2017 dividend of 15.5 cents per Common Share and Series A Common Share, payable on Sep 29 2017, to shareholders of record as of Sep 15 2017. The move indicates the company’s commitment to create value for shareholders and underlines confidence in business growth.

As investors prefer an income generating stock, a high dividend-yielding firm is much coveted. Investors are always on the lookout for companies with a track record of consistent and incremental dividend payments.

Additionally, for 2017, Earnings Per Share (EPS) is likely to grow 8.8%

Broker’s Favorite

We note that earnings estimates for Telephone and Data Systems have moved up in the past 60 days, reflecting optimistic outlook of analysts. The earnings estimate for full-year 2017 and 2018 has increased during the said time frame.

The Zacks Consensus Estimate of earnings for fiscal 2017 has jumped 15.6% to 37 cents per share. The estimate for 2018 has soared 9.1% to 24 cents.

Given the wealth of information at the disposal of brokers, it is in the best interest of investors to be guided by broker’s advice and the direction of their estimate revisions. The direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

Telephone and Data Systems currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The bullish Zacks Rank highlights the stocks attractiveness as an investment option.

In view of the above tailwinds, we expect Telephone and Data Systems to scale higher in the coming quarters.

Other Key Picks

Some other top-ranked stocks in the broader Utilities sector include TELUS Corporation (TU - Free Report) and Telefonica S.A. (TEF - Free Report) . While TELUS sports a Zacks Rank #1, Telefonica carries a Zacks Rank #2.

For 2017, sales and EPS of TELUS are projected to grow 8.8% and 7.7%, respectively.

For 2017, sales and EPS of Telefonica are projected to grow 3.7% and 3.6%, respectively.

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