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European Telecommunication Stocks a Solid Rebound Play


Europe has a ways to go to catch up with the US, but new legislative proposals may boost its telecom industry.

The enormous competitive advantages enjoyed by AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) in the US telecommunications market result from their ability to out-invest smaller rivals.

Asian telecoms such as China Mobile (NYSE:CHL) are also investing heavily in network technology. China is the world's biggest mobile market, with 1.1 billion subscribers.

But there's one region that stands out for its lack of network investment growth, on top of its continuing economic problems: Europe.

AT&T and Verizon spent about $35.7 billion combined on their wireless and wireline networks in 2012 - approximately 54% of the total US network investment.

The Telecommunications Industry Association's (TIA) 2013 ICT Market Review & Forecast reported that US wireless penetration hit 102.5% of the adult population in 2012, surpassing 100% for the first time. Wireless carriers are on track to add 40.3 million subscribers over the next four years, for a penetration rate of 111.3% by 2016.

China's three mobile operators plan to spend a combined $56 billion in 2013 on network infrastructure, and $6.75 billion on 200,000 4G base stations to provide services for their 710 million customers.

Europe is lagging, held back by a still-sluggish economy, as well as a burdensome bureaucracy. While mobile and Internet service is relatively inexpensive and widespread, current infrastructure is increasingly challenged to support new offerings such as video and cloud computing. The Continent trails the US and Asia in the adoption of 4G and fiber-optic technology.

Neelie Kroes, the European Union commissioner running the digital technology portfolio, supports a proposed €50 billion ($68 billion) "Connecting Europe Facility" program for cross-border infrastructure projects. €9.2 billion would support expanded broadband and digital networks. Kroes also favors establishing a single telecom market for Europe.

It's this type of landscape that's allowed AT&T and Verizon to establish fast and reliable service in the US. And their ability to attract and keep valuable postpaid subscribers supports long-term dividend sustainability and growth.

Verizon, in particular, has been a star, with a total return since the March 2009 low for global equities of 160%-plus. It's also been an outperformer over the trailing 12 months, with a total return of 32.7%. AT&T is also up more than 16% over the past year, and 111% since March 6, 2009.

There's hope that Deutsche Telekom's (OTCMKTS:DTEGY) €30 billion, three-year investment plan announced in December 2012 will help lead a return to investment in the Europe, Middle East, and Africa (EMEA) region.

Deutsche Telekom has enjoyed a solid run over the past year, posting a total return in US dollar terms of 26.9%. But the German giant's current dividend rate is in doubt even after a December 2012 cut, as it continues to try to get out of its T-Mobile USA venture.

Telecom Italia (NYSE:TI) and France Telecom (NYSE:FTE) are both in the red over the trailing 12 months. However, Telefonica (NYSE:TEF), for its part, is actively expanding its presence in South America. The company temporarily eliminated its dividend in 2012, but is on track to resume its payout later this year.

Telefonica reported encouraging results for the first quarter of 2013, as revenue contraction stabilized in its home market and organic growth in South America was 6.8%. Telefonica has a ways to go, but it is a good way to play a rebound in Europe.

Editor's Note: This article was written by David Dittman of Utility Forecaster.

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