The Top 5 Large Cap Telecommunication Stocks for 2016

The telecommunication sector is relatively small yet highly competitive, with only a few companies trying to vie for market share. Generally a defensive sector, telecoms are characterized by slow growth and attractive dividend yields. In recent years, the focus of companies in this sector is to dominate the wireless phone market. However, with the advent of cable, satellite, smartphones and tablets, companies have expanded their reach by offering broadband, video and many other services.

The telecommunications industry has a neutral outlook for 2016, with revenue pressure remaining the constant driver behind a company’s success. Many companies have devoted their resources to marketing and new price models to incentivize customers to switch carriers. New versions of smartphones continue to drive wireless customer growth for the larger carriers. The wireline segment is expected to weaken, as cable and satellite providers are offering these services to their existing clientele for a discounted integrated package deal. In an industry forecasted to remain neutral in 2016, the following are the top five large-cap telecommunications stocks that are expected to grow.

AT&T, Inc.

AT&T, Inc. (NYSE: T) is the largest company in the telecom sector with a market capitalization of $206 billion, narrowly beating its biggest competitor, Verizon Communications. Revenues for AT&T are expected to increase by 12% in 2016, following a successful 12% rise in 2015. Both AT&T and Verizon stand head and shoulders above the rest of the U.S. wireless industry, which allows them strong and consistent profits. AT&T has been making headway by doing a good job of capitalizing on its wireless position, driving improvements in customer service and cutting costs. Adding the “Next” financing model promises better matching phone costs and revenue.

In mid-2015, AT&T merged with DirecTV to gain instant access to its already growing cable/satellite U-Verse division. AT&T can directly market and offer discount package deals to existing DirecTV customers. This also incentivizes any wireless customers to switch to AT&T's satellite/cable services. In 2016, the merger should be complete and investors should start seeing the positive synergy created between the two companies. For investors looking for a great dividend of 5.5% and a price target of $38, AT&T is an excellent choice.

CenturyLink, Inc.

CenturyLink, Inc. (NYSE: CTL) is a mid-sized carrier in the telecom sector that provides an array of communication services to residential, business, governmental and wholesale customers. Services include local and long distance, broadband, Ethernet, private line, data integration and video. CTL has faltered over the past year in both revenues and earnings stability due to management missteps in the business services unit. This has caused its stock to drop over 30% in 2015. Analysts believe the stock has bottomed and management has corrected the problem, leaving investors to capitalize on it bouncing back.

CenturyLink acquired both Qwest and Savvis a few years ago to further expand its reach in the enterprise services market. Since the company has had time to establish its footprint and better assimilate both companies’ resources, CenturyLink sees growing potential in both revenue and market share. With the stock trading near its 52-week low and providing one of the highest dividends in the sector, yielding over 7.5%, CenturyLink should be in a good position to appreciate in 2016. Expect the price to grow to $35.

China Telecom Corp. Ltd.

One of the main telecom companies in China, China Telecom Corp. Ltd. (NYSE: CHA) provides wireline, wireless, Internet and managed data. In 2008, China Telecom benefited from the Chinese telecom reorganization in which the government granted 29 million wireless subscribers from China Unicom. Since then, CHA has grown its wireless base six-fold to over 194 million. This growth has enabled the business to become more profitable, as the network’s fixed costs are spread over a much larger customer base.

China Telecom has also doubled its broadband base to over 110 million over the last few years. It also increased margins by cross-selling its customer base with other products such as wireline services. With China Telecom’s past track record of growth, pending move to 4G and cross-selling abilities, expect the ADS to grow to $60 in 2016.The largest growth potential for China Telecom is the pending move to 4G from the poorer quality 3G CDMA technologies it inherited from China Unicom. This should provide a second stimulus to China Telecom’s already growing wireless base as more consumers are flocking toward the higher quality 4G network.

Orange

Orange (NYSE: ORAN), formerly known as France Telecom, is a major competitor in Europe’s complex communications market. Orange offers wireline, wireless, multimedia, Internet, data transmission, cable television and other services. Europe has been trending to the converged services model, under which customers subscribe to wireline, broadband and wireless services with one provider. Having all three services, Orange can differentiate itself from its competitors that only offer independent solutions. Europe, especially France and Spain, has begun the switch to 4G and Fiber, from which Orange will capitalize. Orange claims to have 20% of France using its 4G service already and continues to maintain its dominance over the rest of the country.

Orange sees external growth factors coming from smaller acquisitions outside of Europe. Since 2007, it has entered seven new African or Middle Eastern countries, including Iraq, Morocco and the Congo. As of July 2015, Orange has put in a bid to buy more companies in Africa from Bharti Airtel. If the deal closes, this gives Orange operations in 21 African countries, which is one of the fastest-growing regions in the world. With increasing revenues both home and in developing countries, Orange looks poised to grow to at least $20, while providing a dividend of nearly 4%.

SBA Communications Corp.

SBA Communications Corp. (NASDAQ: SBAC) is the only company to not provide wireless or wireline services to consumers on this list. SBAC is a leading operator of wireless communications towers in North and Central America. The wireless tower industry gives investors access to fantastic cash flow and exposure to rising wireless demand. The industry structures long-term contracts for providers with high switch costs, which provide them with a solid customer base. SBAC, in particular, has nearly 40% of its towers internationally, which diversifies its revenue stream and adds growth potential with wireless carriers continually needing tower services abroad.

SBA Communications differentiates itself by not providing a master lease agreement for the carriers unlike its competitors American Tower and Crown Castle. Instead of allowing carriers to operate on a holistic basis, the company negotiates on a site-by-site basis and maximizes revenues due to increasing need. With SBAC’s consistent revenue stream, potential growth internationally and its lease structure, it should reach a price target of nearly $120 in 2016.

The telecommunications sector should be part of every portfolio as it is defensive in nature and most companies provide healthy dividends. While the outlook for 2016 is neutral for the industry as a whole, the five stocks mentioned should provide investors with some upside. Make sure to perform further due diligence prior to purchasing any stock. Telecom should be one of the many sectors within a portfolio that is diversified across both sectors and asset classes according to risk tolerance.

By Brian Beattie

Source:http://www.investopedia.com/articles/markets/120815/top-5-large-cap-telecommunication-stocks-2016.asp