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Warning: Telecom Prices May Be Too High

NEW YORK ( TheStreet) -- The U.S. Labor Department released a report on Sept. 25 saying that spending on phone services increased more than 4% in 2011 which was the fastest rate of growth since 2005. Customers want to stay connected and are activating cell phones like there's no tomorrow.

According to a recent Wall Street Journal report titled, "Cell Phones are Eating the Family Budget," more than half of all U.S. cell phone owners carry a "smart-phone" like the iPhone or a Droid. It's becoming more common for families to spend $200-a-month or more on cell phone services, and that trend looks like it may continue in the months ahead.

This has been part of the reason that the shares of the big telecom companies have been going to 52-week highs as revenues increase and so do dividend yields. The shares of the two big giants, Verizon (VZ - Get Report) and AT&T (T - Get Report) have been acting more like growth stocks instead of stodgy telecommunications companies.

By market cap the bigger of these two is AT&T. Weighing in with a $220 billion market cap, T hit its 52-week high of $38.58 on Sept. 21 and has barely corrected. With its close Wednesday of $38.08 it's been afforded a price-to-earnings ratio of over 50 and a forward P/E of almost 15.

Perhaps we shouldn't be surprised. According to The Journal article, the trend of multi-cell phone families is expanding so fast that big telecoms like AT&T and Verizon Wireless brought in $59 billion in revenue in 2011. That's a big jump over the $22 billion in revenue they earned in 2007.

As you can see from the 5-year chart below, revenue-per-share growth has been one of the big drivers of share price growth. Selling services like mobile email and Web browsing is a very lucrative business.

T Chart T data by YCharts

Cell phone services are one of the household spending categories that actually accelerated since the beginning of the Great Recession. According to the Labor Department, spending on "telephone services" has increased by 10% for households in America since 2007.

Although last quarter's revenue growth was less than 1% year-over-year for AT&T, that still means their trailing-12-months revenue-per-share was a whopping $21.57. Their operating cash flow (trailing 12-months) was $35.35 billion dollars and their levered free cash flow was $9.69 billion.

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T $34.56 0.00%
VZ $49.45 0.00%
AAPL $128.46 0.00%
FB $78.97 0.00%
GOOG $558.40 0.00%


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S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

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