We are upgrading our long-term recommendation to Outperform from Neutral for Telephone and Data Systems (TDS). Currently, the stock has a Zacks #3 Rank (Hold), which signifies that for the short term (1-3 months), we are maintaining our Hold rating.
Telephone and Data Systems’ is seeing the benefits from a number of actions taken in 2009 such as, bundled and unlimited service plans, early smartphone upgrades, expanded handset portfolio including Android-powered devices, and innovative programs like battery swap and overage protection. The company is offering competitive smartphones over the past several months, which are driving data revenues and are expected to do so, going forward.
During the third quarter of 2010, Telephone and Data Systems’ earnings surpassed the Zacks Consensus Estimate by 2 cents. Both the wireline and wireless revenue increased owing to strong data revenues. The company’s residential broadband and commercially managed service offerings contributed to strong data revenue growth.
The company is pursuing several initiatives to reinvigorate growth, which include the expansion of its 3G network, premium handset offerings and the potential launch of Long-Term Evolution (LTE) in 2012 in the wireless business and aggressive deployment of Triple-Play bundled wireline services.
Further, the new service named “The Belief Project” (launched in October) is expected to enhance long-term profits along with the reduced churn and higher gross subscriber additions.
Further, we remain impressed with Telephone and Data Systems’ solid balance sheet, which provides flexibility and supports investment for future growth. The company is committed to providing benefits to shareholders in the form of dividends and share buybacks.
Telephone and Data Systems’ currently pays an annual dividend of 45 cents per share. This represents a low dividend yield of approximately 1.24% compared with its peers AT&T Inc. (T) and Verizon Communication (VZ). Both the companies have dividend yields of approximately 6%.
Apart from all these positives, we are concerned about intense competition in the wireless and wireline business, continuous decline in roaming revenue and high costs associated with the expansion of its wireless network, which may provide downside risk to the stock. Hence, we are cautious in the short term.