We are currently maintaining our long-term Neutral rating on Telephone and Data Systems Inc. (TDS). The stock retains a Zacks # 3 Rank, implying a short-term Hold rating.
Telephone and Data Systems is pursuing several initiatives to reinvigorate growth in both the wireless and wireline segment. However, these growths are restricted due to significant challenges in the wireless business as well as stiff competition from cable operators and Internet-based service providers in the wireline space.
Fourth quarter results missed our earnings and revenue estimates but exhibited year-over-year improvements. Intense competition in both wireless and wireline businesses were responsible for lower-than-expected results. The company’s wireless subsidiary, U.S. Cellular Corp. (USM) reported a slight increase in revenue during the fourth quarter. Low churn and higher roaming revenues were partially offset by subscriber losses. Wireline revenue improved due to growth in data revenue, partly offset by a decline in voice and network access revenues.
Despite the continuous erosion of access line, Telephone and Data Systems reported solid 2010 results with improved revenue and operating margin. For 2011, we believe Telephone and Data Systems is well positioned for growth based on various competitive offerings, attractive Android-based smartphones sales, bundled and unlimited service plans, the expected launch of LTE services in 2012 as well as exceptional services in the form of “The Belief Project”.
Additionally, Telephone and Data Systems boasts a sound balance sheet, which provides flexibility and supports investments for future growth. The company is committed to provide benefits to shareholders in the form of dividends and share buybacks. For 2011, the company raised its annual dividend by 4.4% to $0.47.
However, Telephone and Data Systems’ dividend yield of 1.43% is much lower than its arch rivals. Notably, Verizon Communications Inc. (VZ) and AT&T Inc. (T) yield a respective 5.09% and 5.72%.
Further, U.S. Cellular’s high-margin roaming revenue remains under pressure. While this reflects an industry-wide trend, it is likely to impact U.S. Cellular more than most of its peers given its strong reliance on roaming fees and pricing factors. Telephone and Data Systems, in order to maintain its competitive edge, has to spend hugely for the expansion of its wireless network.
Thus, by judging all pros and cons, we remain cautious on Telephone and Data Systems at present.
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TELEPHONE &DATA (TDS): Free Stock Analysis Report
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