As part of our MoneyShow Top Picks report 2023, we ask the nation’s leading financial newsletter advisors to select their favorite ideas for conservative investors and income seekers. Here are 6 such picks that fall within the broad utility and telecom sector.
Nancy Zambell, Cabot Stock of the Month
Just for fun, I recently searched for stocks that had fallen 10% or more from their 52-week highs, thinking that some of them may have declined due to market factors that didn’t reflect the company’s potential. Unbelievably, I came up with a total of 7,015 stocks out of my database of 8,377 stocks!
I narrowed my search again, looking for companies with positive institutional transactions, positive insider transactions, and technical and analyst ratings of Strong Buy. The result: 6 names, which I then winnowed down to what I think is the best one for 2023.
The company is a utility, The York Water
Although 71% of the Earth’s surface is covered in water, only half a percent is drinkable. And with a global population of more than 8 billion (and growing!), water is a ‘hot’ commodity.
York impounds, purifies, and distributes drinking water, serving customers in the fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergents, barbells, and motorcycle industries 51 municipalities within three counties in south-central Pennsylvania.
The company posted Q3 EPS of $0.40, topping analysts’ estimates by $0.02. Revenue rose 9%, to $15.81 million, also beating analyst’s estimates by $0.81 million. In the last four quarters, York Water has met analysts’ earnings estimates once and beaten them the remaining three periods.
Institutions own abut 48% of the outstanding shares of York Water, and hedge funds have recently increased their ownership of the stock. York pays a dividend yield of 1.79%, and the company has the longest record of consecutive dividends since 1816. For a steady company with an essential product, growing earnings, and a consistent dividend, York Water should be on your shopping list for 2023.
Uncertainty is plentiful in today’s financial world, as investors try to sort out a reasonably strong economy, historically high inflation, war in Ukraine, and aggressive Federal Reserve monetary policy. Unfortunately, the increased uncertainty has resulted in above-normal volatility in the stock and bond markets this year.
Price pressure on mutual funds and ETFs of almost every type has necessitated a close review of all our positions. We have identified an opportunity among our Specialty holdings to help improve performance going forward.
For conservative investors (or those looking for a conservative sleeve) we are establishing a position in utilities. Utilities funds are used as a defensive investment, providing a combination of capital appreciation and dividend yield with a lesser risk profile than a typical growth or value domestic stock fund.
Dividends from utility companies often outyield other fixed-income investments, and utilities tend to be very resistant to economic cycles. This is because demand for utilities does not change much compared with most other industries, even in economic hard times.
We sold some of our balanced fund positions in all three of our Conservative model portfolios to fund the Utility position. Removing balanced funds makes some sense on its own merits, as we can replicate those funds’ allocations with our own commitments to stock and bond funds.
Fidelity Select Utilities (FSUTX) is considerably less risky than the market, showing a beta of 0.69 (11/30/22). This reflects the steady demand that we described above. Of course, changes in government regulations, fuel prices, the cost of financing, natural resource conservation, and more could affect the attractiveness of the underlying stocks.
The fund held approximately 72% in electric utilities as of October 31, the most recent data available. It held less than one percent in oil & gas storage and transportation. Here are the top five holdings: NextEra Energy
Fidelity Select Utilities — a large cap value fund — has had a 2022 YTD return (through 12/7/22) of 5.1%. In comparison, the Vanguard 500 Index ETF (VOO
Bruce Kaser, Cabot Turnaround Letter
Nokia (NOK) is one of the world’s primary providers of telecom equipment and is a Top Pick for conservative investors in the coming year. Based in Finland, the company struggled with disappointing new product initiatives including mobile phones, a lack of a major telecom upgrade cycle, a wrong-way bet on semiconductor technology, and weak leadership.
Its €15.6 billion acquisition of Alcatel-Lucent in 2016 has been a disappointment as well. Current worries include the intensely competitive environment, particularly in radio access networks, a core component in telecom systems. Nokia shares have gone nowhere in the past ten years.
New leadership, however, is refocusing and rebuilding Nokia. Pekka Lundmark helped develop Nokia’s business in the 1990s, then gained valuable business and leadership experience from impressive roles at other major companies until rejoining Nokia as CEO in late 2020. Under Lundmark, the company has corrected its semiconductor mistake, reinvigorated its sales efforts, streamlined its profit structure and is investing heavily in new product development that is lifting its market share trajectory.
These improvements are showing up in the company’s financial results. Sales growth hit 6% ex-currency and earnings per share rose 25% in the most recent quarter. The operating profit margin dipped, but this was due to a timing issue with high margin patent contracts. Nokia remains on-track to maintain and build upon its already-improved margins, even as it ramps up its technology spending.
Global telecom service providers continue to ramp their spending for the rollout of 5G technology. India has been widely cited as a large and upcoming new market. Due to security concerns, China’s Huawei is being sidelined, leaving more market share opportunities for western companies like Nokia. While the industry is highly competitive, Nokia is increasingly capable of maintaining its position, at a minimum.
Free cash flow is strong, allowing the company to now hold €4.7 billion in cash above its debt balance. With its new financial flexibility, Nokia has restored its dividend and is about halfway through its €600 million share repurchase program. The share valuation at 4.8x estimated 2023 EBITDA, is unchallenging. All-in, this under-appreciated company offers an attractive turnaround opportunity for 2023.
Verizon Communications
Today, Verizon is one of the three largest American telecommunications companies. Verizon has about 120 million wireless connections, including 91 million postpaid, four million prepaid customers, and around 25 million data devices. In addition, Verizon has about 6.7 million FiOS and other connections.
The company also has approximately 25 million fixed-line telecom connections. The company sold its AOL and Yahoo businesses in 2021. Total revenue was around $133,613 million in the fiscal year 2021 and about $135,651 million in the last twelve months.
One of the main issues affecting retail cellular subscriber growth is slow data speeds. The company offers 5G, but the speeds are slower than those offered by T-Mobile (TMUS) or AT&T (T). In addition, AT&T has divested its content offering and is more focused on providing services. Additional competition is present from cable companies offering cellular service.
Another risk is that Verizon’s balance sheet debt grew because of C-band spectrum purchases. That said, debt is trending down. The firm has $2,082 million in total cash and short-term investments, $14,995 million in current debt, and $132,912 in long-term debt. The credit rating agencies give Verizon a BBB+/Baa1 lower-medium investment grade rating.
Although Verizon has near-term challenges, long-term it is positioned for growth. The company is rolling out its 5G offerings, including the faster mmWave technology called the 5G Ultra Wideband and the C-band. This should speed up data downloads and uploads and expand geographic coverage to better match its two primary competitors, reversing subscriber losses.
In the time being, Verizon sports a 7%+ dividend yield backed by a relatively conservative payout ratio of approximately 47%. In addition, Verizon is a Dividend Contender, having raised the dividend for 18 consecutive years. Verizon is a deal now. It is valued at a P/E ratio of ~7.2X, compared to a range of about 12X to 15X in the past decade. As a result, investors are getting an undervalued stock, a yield almost at a decade high, and consistent dividend growth.
Roger Conrad, Conrad’s Utility Investor
Dominion Energy (D) — a Top Pick for conservative investors — raised the mid-point of projected 2022 earnings, after reporting Q3 at the top end of its guidance range. However, the announcement of a “top to bottom” strategic review of the business and withdrawal of long-term earnings guidance understandably spooked investors.
Memories of the abrupt 2020 sale of its midstream energy business and one-third reduction in the dividend are still fresh. And the result was a mass shift of Wall Street recommendations from buy to hold, with the share price plunging by more than -20 percent year to date, including dividends paid.
In this case, however, the most likely outcome is asset sales that actually unlock shareholder value. The three most likely candidates are Dominion’s remaining 50 percent stake in the Cove Point LNG export terminal in Maryland, the unregulated Millstone nuclear plant in Connecticut and the renewable natural gas development assets.
All have gained considerable M&A value because of rising natural gas priced. So selling proceeds should enable considerable reduction of debt. But together they account for less than 10 percent of Dominion’s earnings, meaning dividends will remain comfortably funded, even before interest cost savings from debt reduction and rate base growth from elevated utility CAPEX.
I don’t expect the stock make much headway until the company resets its long-term earnings growth guidance, not likely before Q4 earnings in early February. But the discounted valuation and yield of just under 5 percent are pricing in very low expectations that won’t be hard to beat. Buy at $65 or less.
Meanwhile, owning AT&T Inc (T) — a Top Pick for aggressive investors — has been an exercise in patience since the retirement of visionary CEO Ed Whitacre. The current CEO John Stankey and his team have been returning AT&T to its telecom roots. They started with some tough medicine: Halving the dividend and completing the disappointing spinoff of Warner Brothers Discovery (WBD), followed by two successive first half reductions in 2022 earnings guidance.
But now investors have reason to be hopeful again. Management raised the mid-point of its 2022 earnings guidance range following strong Q3 earnings. It affirmed its $14 billion free cash flow target for the year, a level that would cover dividends with $4 billion plus to spare. And despite inflation pressures and tough competition, the company expects to do much better in 2023, projecting $17 billion in free cash flow.
I expect 5G to ultimately become a more robust driver of growth for AT&T and its primary rivals T-Mobile US (TMUS) and Verizon Communications (VZ). The company already has over 100 million Internet of Things connections, including one million automobiles. And its 5G and converged fiber broadband offerings continue to meet with success.
My expectation is AT&T will surprise investors with a low to mid-single digit percentage dividend increase next year. But even the current yield of nearly 6 percent is attractive. And at just 7.7 times expected next 12 months earnings, investor expectations are quite low and therefore easy to beat.
With risk of a recession and further stock market downside looming large, it may be some months before AT&T shares show meaningful gains. But I’m comfortable rating the stock a buy for very patient value seekers at a price of $20 or lower.
Source: https://www.forbes.com/sites/moneyshow/2023/01/04/utility-and-telecom-picks-for-2023/