Telecom Corp. of New Zealand (NYSE ADR: NZT) is the classic example of a dividend trap. The stock has a hefty payout and it's been on a tear over the past year – but if you dig a little deeper, it's easy to see that the company's fundamentals are deteriorating.
That means you can't rely on its payout anymore than you can rely on Greek bonds.
This makes Telecom Corp. of New Zealand a "Hold" – at least until a needed pullback gives investors a chance to add more shares.
No doubt, uncertainty is the operative word in developed markets. The debt-ceiling debate in Washington came to an unsatisfactory conclusion that did little to alleviate the U.S. debt burden. Meanwhile, the bail out of the bail out of Greece has left Western investors with virtually no European alternatives for fixed-income investments.
That's why I've been looking around the world for higher-yielding, lower-risk investments. Truly, the yields on some stocks these days actually remind me of the old bond yields of yesteryear.
And at first glance New Zealand Telecom looks like it fits the bill. The stock has a forward annual dividend yield of 4.1%, and it's up 50% in the past year – compared to an 11% increase for the Standard & Poor's 500 Index.
But in this case, a closer look at the company reveals the following:
- New Zealand Telecom's earnings are on the decline.
- The stock's dividend was recently cut.
- And it has a negative payout ratio.
To begin with, New Zealand Telecom has quarterly earnings growth of -23.7% year-over-year, according to Yahoo! Finance. Wall Street hates to see a company's top line capped. So a lack of quarterly revenue growth will soon become an issue.
But what's more troubling is the company's dividend. The company has a 165% payout ratio. This is not sustainable, even after a recent dividend cut.
So while the stock may be breaking out to new highs, the New Zealand Telecom's fundamentals are deteriorating.
Shares of Telecom Corp. of New Zealand closed down 4.9% at $10.87 yesterday (Thursday) in a market-wide sell-off. They've traded in a 52-week range of $6.96 -$11.70.
Telecom Corp. of New Zealand is a "Hold" until its internal fundamentals improve, or its stock price has pulled back sufficiently from 52-week highs. It appears to me that international investors are seeking yield wherever they can find it – even if it is not sustainable.
I believe that once yields on sovereign bonds stabilize, stocks like Telecom Corp. of New Zealand will see a pullback in share price.
If you already have shares in Telecom New Zealand, I would continue to hold them. However, I would not commit new capital until the stock pulls back.
(**) Special Note of Disclosure: Jack Barnes has no interest in Telecom Corp. of New Zealand (NYSE: NZT).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays.]
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