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Sector Watch: Spotlight Telecommunications Stocks

The telecommunications industry is evolving quickly.  Recent data suggests, for example, that half of all adults in the United States have a tablet or smartphone.  There are many countries that have an average of more than one cell phone line per person.  In the developing economies, cell phones have allowed much broader access to voice and data services than would have been possible if the traditional fixed-line infrastructure needed to be built.  Ten years ago, Nigeria had only 100,000 phone lines.  Today, Nigeria has 100 Million cell phone accounts.  The ways that people use telecommunications are also expanding.  For people with little or no access to banking, mobile money services can provide the essential roles of banking.  The continued convergence of banking with telecommunications has substantial implications for both.

While the companies that sell devices, such as Apple and Amazon, seem to get the most attention, the companies that provide the actual voice and data services that support all of these devices are worthy of consideration.  The companies that provide the voice and data services are collectively referred to as Telecommunications firms.

Performance

Folio Investing launched its Telecom Folio in April of 2000.  This Folio holds an equal-weighted allocation to the stocks of the thirty largest telecommunications firms as ranked by Zacks.  The Folio holds both domestic and international stocks.  Over the 12 months through September 2012, the Telecom Folio has returned 10.92%, far below the 26.95% return for the S&P 500 over the same period.  The dividend yield for the Telecom Folio is 4.2% as compared to 1.96% for IVV, the iShares S&P 500 Index ETF.

The average Price-to-Book ratio for the stocks in the Telecom Folio is 1.16 as compared to 2.14 for the S&P 500.  The stocks in this Folio are much cheaper than the average for the S&P 500 on the basis of this measure.

Industry Overview

Companies in this sector provide a diverse set of services.  The traditional role of Telecoms was to provide phone services over fixed lines.  Today, Telecoms provide a vast array of services from mobile banking to streaming video, as well as the more traditional data services.  In some ways, Telecoms resemble energy utilities.  They provide many basic services that all households and businesses rely on.  In other ways, Telecoms act like technology firms, powering new media.

Portfolio Holdings

The Telecom Folio consists of large companies that range from wireless providers to telecommunications conglomerates that provide multiple services in the telecommunications industry.

AMX America Movil S A De C V Adr L Shs 3.33%
AVIFY Advanced Info Svc Pub Ltd Sponsored Adr 3.33%
BCE Bce Inc 3.33%
BT Bt Group Plc Adr 3.33%
CHA China Telecom Ltd Spon Adr H Shares 3.33%
CHL China Mobile Limited Adr 3.34%
CHTR Charter Communications Inc Del Cl A New 3.34%
CHU China Unicom Ltd Adr 3.34%
CTL Centurylink Inc Com 3.33%
DTEGY Deutsche Telekom Ag Adr 3.33%
DTV Directv Com Cl A 3.34%
FTE France Telecom Adr 3.34%
FTR Frontier Communications Corp Com Cl B 3.33%
LVLT Level 3 Communications Inc 3.33%
MBT Mobile Telesystems Ojsc Adr 3.33%
MIICF Millicom Intl Cellular S A Shs New 3.33%
NTT Nippon Teleg & Tel Corp Adr 3.34%
PCS Metropcs Communications Inc 3.34%
PT Portugal Telecom S A Adr 3.33%
S Sprint Nextel Corp Com 3.33%
T At&T Inc Com 3.34%
TI Telecom Italia S P A New Adr Ord 3.33%
TLK P T Telekomunikasi Indonesia Adr 3.33%
TSU Tim Participacoes Sa Adr Pfd 3.34%
TU Telus Corp Non-Vtg Shs 3.33%
VIP Vimpelcom Ltd Sponsored Adr 3.33%
VIV Telefonica Brasil S. A. Adr 3.34%
VOD Vodafone Group Plc Adr 3.33%
VZ Verizon Communications Inc. 3.33%
WIN Windstream Corp 3.33%
Source: Folio Investing

[Note: The holdings are re-evaluated and updated (as needed) on a quarterly basis.]

Commentary

One of the major draws for investors from Telecom stocks is that their dividend yields tend to be high.  The average yield for the Telecom Folio is somewhat skewed by a number of firms with very high yields.  France Telecom (FTE), which provides service to more than 200 Million customers on five continents, has a yield of 12.91%.  KPN, the major telecommunications provider in the Netherlands (ticker: KKPNY) yields 13.7%.  These kinds of yields are accompanied by considerable risk, however.  Over the past year, the price of KPN has fallen by more than 37% and the stock is 60% below its five-year high.  France Telecom’s stock price (FTE) has fallen by 15.7% over the past year and remains at 69.9% below its five-year high.  The dividend yields are so high largely because the prices have fallen but the dividends have not been cut.  On the other hand, these two companies look remarkably cheap compared to their earnings, a characteristic of the entire sector, typified by these two stocks.  FTE trades at a P/E of 6.9 and KKPNY has a P/E of 6.8 as compared to the 12-month P/E of 16.8 for the S&P 500.

A number of telecoms have experienced major declines in prices over the past year, even as the broader market has rallied.  This divergence between telecom stocks and the major stock indexes can be attributed to increased competitiveness in the industry and the slow recovery in the global economy.  The depressed prices and high yields also reflect concerns about deteriorating credit ratings for some of these firms.  For even the largest telecoms, the ratings agencies have expressed concern that they are under stress due to continuing economic instability at the national level, as reflected in current high yields on government bonds in a number of European countries.  Moody’s projects that Telefonica (TEF), another component of the Telecom Folio, is under considerable pressure due to overall poor economic conditions in Spain, for example.

While telecom stocks, like utilities, tend to have fairly high dividend yields (and fairly high P/E ratios), the current global economic malaise has caused a sustained drop in prices across the sector.  Non-U.S. firms have been disproportionately affected.  The current high yields reflect broad uncertainty with regard to the futures of even the largest firms.

Disclaimer

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services.

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