Telecommunications stocks have long been favorites among American investors, both for their sustained growth and their typically lucrative dividend payouts. What many investors don’t realize, however, is that U.S. telecom giants now badly lag the rest of the developed world in one key part of the telecommunications sector — broadband Internet service.

Broadband providers in much of the rest of the world offer much faster connections at generally much lower prices. And those overseas players tend to have much more room for growth than the highly saturated U.S. market.

That’s why investors who are seeking to maximize their long-term profits from the telecom sector need to start looking at the industry’s emerging international players.

“The average U.S. household has to pay an exorbitant amount of money for an Internet connection that the rest of the industrial world would find mediocre,” reported a recent issue of Scientific American.

A U.S. Broadband Deficit?
That magazine report cited a recent study by the Berkman Center for Internet and Society at Harvard University, which concluded that U.S. broadband service is “not just slower and more expensive than in tech-savvy nations” such as South Korea and Japan, but the U.S. has also “fallen behind infrastructure-challenged countries such as Portugal and Italy.”

This disparity has negative implications not just for U.S. Internet users, but also for domestic telecom stocks and, most worrisome, for the United States economy as a whole.

Calling broadband connections “the railroads of the 21st century,” the Berkman research study stated that “our creaky Internet makes it harder for U.S. entrepreneurs to compete in the global marketplace.”

Berkman researchers noted that the United States is now sorely lacking in the infrastructure required to transmit products – products that these days are information-focused – from seller to buyer. The Berkman report also cited another recent study that showed the U.S. economy coming in “dead last” in a comparison of how quickly over the past decade that 40 countries and regions around the globe have been “progressing toward a knowledge-based economy.”

That’s a distressing finding — on a number of fronts.

First, this dour landscape speaks to a loss of U.S. focus from just 10 years ago, when American Internet-service providers ranked at or near the top in most studies of Internet price and performance.

Second, it means the United States is experiencing an ongoing market-share decline in a growing global business sector. That sector is expected to advance from $1.7 trillion in 2008 to $2.7 trillion by 2013, according to Plunkett Research Ltd.

“We are at risk in the global race for leadership in innovation,” Federal Communications Commission (FCC) Chairman Julius Genachowski said in a recent address. “Consumers in Japan and France are paying less for broadband and getting faster connections. We’ve got work to do.”

Genachowski’s statement is somewhat ironic given that it was a 2002 FCC decision that most observers have identified as the catalyst that touched off the decline of the U.S. broadband sector. At that time, the FCC reclassified broadband systems, stating that they were “information services” rather than “telecommunications services.” The decision put Internet services in the category of “content providers,” much like MSN, Google and Yahoo!, rather than “communications providers,” like telephone companies that own phone lines, satellites and the like.

The result was the elimination of competition. Unlike phone service, where consumers have a wide range of choices in both fixed-line and wireless systems, broadband users generally have only two ways of accessing the Internet – via their cable company or through the phone company. Both options rely heavily on fixed lines that also transmit other types of signals – television, music and phone calls, for instance. And that makes them slower.

By contrast, most other developed nations require companies that own the physical communications infrastructure to sell access to independent Internet providers at wholesale rates – meaning consumers who want high-speed Internet access can choose from among many companies, all of which have to compete in terms of service and price.

Presently, the United States and Mexico are the only two members of the 32-nation Organization for Economic Co-operation and Development (OECD) that don’t promote Internet competition.

The FCC is currently considering a change in the rules, but the proposal on the table would still restrict third-party competition, a political concession to existing Internet-service heavyweights like AT&T Inc. (NYSE: T) and Comcast Corp. (Nasdaq: CMCSA). Those companies now have a virtual monopoly in many areas, but will likely see shrinking margins as a result of market saturation and their inability to offer innovative new products developed in more competitive foreign markets.

Foreign technological advances – and the companies that deliver them – are also being heavily supported by government aid programs.

Despite news stories about potentially restricting access by its citizens, China has committed more than $10 billion to expanding its domestic Internet market. It is also steadily progressing in deployment of its new internal 3G network, providing subsidies for numerous wireless operators, telecom-equipment makers and handset manufacturers.

Similarly, India has just completed an auction of bandwidth spectrums for 3G service and is beginning deployments of the service. Several Central American, Latin American and European countries are also in the process of allocating spectrums for next-generation high-speed systems.

The United States is also supporting Internet expansion through U.S. President Barack Obama’s $7.2 billion Broadband Stimulus Program. But the first $4 billion of that was dedicated primarily to expanding broadband access to rural areas and widening the available spectrum size over the next 10 years.

A more likely source of innovation in the U.S. market will come from smaller startup companies built on new ideas – and there are apparently plenty of them around. A Forbes magazine survey conducted in mid-December found that during 2010, venture capitalists poured more money into information technology than any other sector, with telecommunications funding ranking as the third choice for venture investors (just behind healthcare).

Top Global Profit Plays

Given the increasing foreign lead in Internet development and technology, as well as the huge market potential offered by developing economies around the globe, it only makes sense for investors – U.S. and otherwise – to target foreign companies with their telecom investment dollars for the near-term.

Following are several stocks that trade on U.S. exchanges and offer access to highly promising foreign markets.

  • America Movil SAB de CV (NYSE ADR: AMX), recent price $58.88: America Movil provides Internet and wireless-communications services in Latin America – including Argentina and Chile – and also owns 3.8 million fixed lines in Central America and the Caribbean. The company recently completed acquisition of Telemex International (TI) from Mexican communications billionaire Carlos Slim, and more acquisitions could be in the works since the company has $14.4 billion in cash and a levered free cash flow (FCF) of $5.92 billion. AMX had earnings per share (EPS) of $3.22 over the past 12 months, giving it a Price/Earnings (P/E) ratio of 18.2. The stock pays a modest dividend of 26 cents per share, giving the stock a dividend yield of slightly better than 2.0%.
  • China Mobile Ltd. (NYSE ADR: CHL), recent price $49.66: As its name illustrates quite clearly, China Mobil provides mobile-telecommunications services in all 31 of China’s provinces, and had a massive roster of 544.2 million customers in April 2010. Its wireless services are satellite-based, and it has a new 3G network in place – thanks to capacity leases from China’s government-run China Mobile Communications Corp. The company reported earnings of $4.34 per share over the past year, giving it a modest P/E of 11.52. The annual dividend of $1.64 equates to a healthy yield of 3.28%.
  • Millicom International Cellular S.A. (Nasdaq: MICC), recent price $97.17: MICC provides wireless phone service in 14 emerging-market countries in Asia, Africa, Central and South America, as well as fixed-line telephone, cable and broadband service in five countries in Central America. The stock traded at nearly $103, before slipping below $70 in the spring sell-off. Adjusted EPS for the trailing 12 months were $17.90, giving it a P/E of just 5.47. The dividend of $2.38 a share provides a yield of 2.43%.
  • VimpelCom Ltd. (NYSE: VIP), recent price $15.53: VIP provides voice and data services using fixed, wireless and broadband technologies in Russia, the Ukraine, and other former Soviet countries, as well as in Vietnam and Cambodia. The company’s current service area has a population of roughly 345 million, but its potential market should grow, thanks to the announcement earlier this year of plans to expand into Eastern Europe and other areas outside the Commonwealth of Independent States (CIS). VIP reported trailing earnings of $1.29 per share, giving it a P/E of 11.85, but the stock pays no dividend.

If putting your money in a single company or country carries too much risk to suit you, there are also exchange-traded funds (ETFs) that focus on the international telecom industry. Here are two:

  • SPDR S&P International Telecommunications Sector ETF (NYSEArca: IST), recent price $24.40: Top countries represented in IST’s portfolio include the United Kingdom (24%), Japan (15%), Spain (13.9%) and France (6.7%). The fund has a P/E of 9.12 and reported a trailing 12-month yield of 4.37%.
  • iShares S&P Global Telecommunications Index Fund (NYSEArca: IXP), recent price $58.69: Although this fund is slightly less attractive – given that its top country holding is the United States (with 29.9% of the weighting) – other holdings include the United Kingdom (14%), Japan (8.3%) and Spain (8%). The fund has a P/E of 11.10, and reported a trailing 12-month yield of 4.17%.

–Larry D. Spears

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Source: Money Morning