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Telecommunications: its Days Are Numbered


Telecom stocks are the worst group in the history of the world. Well maybe that is offensive. So like Kathy Griffin, Bill Maher and Stephen Colbert, I will apologize. I used the politically incorrect term, world. Let’s start over.

Telecom stocks are the worst group in the history of the first half of 2017. The S&P 500 Telecom Sector is down 10%. Ok, there now that’s better. Still, a 10% drop in a market that has risen 9%, I am sorry but that just sucks.

Things are so bad that The Standard & Poor’s Corporation is actually thinking of eliminating the Telecom Index altogether. So let’s take a look at why this is happening and see if we can find some hidden values that investors are overlooking.

Going, Going Almost Gone

S&P’s consideration in eliminating the Telecom Index is based on the reality that it isn’t worth saving. To be an Index, there has to be stocks. All the way back in the 1990’s there were 17 stocks in the Index. Today there are only 4 and that may be reduced further in the coming months.

If so, it would leave AT&T, Verizon and Century Link as its only members. Mergers over the past 25 years have whittled the numbers. S&P might consider adding T-Mobile to the index, but Japan’s SoftBank is already pursuing it.

The very monopoly that the United States Congress broke up in 1984 (AT&T) has come full circle in 2017.

Wireless Pressures: The Squeeze Is On

In the final analysis, just AT&T and Verizon are the big factors in how the S&P Telecom Index performs. The common thread here is the health of the wireless business. It been great for years but now new forces are at work.

Cord cutting, the act of shifting from fixed location viewing on cable TV to the Internet and mobile devices is pushing demand for AT&T/Verizon mobile services to record levels.

Add to that the public’s entire fixation on texting not to mention the upsurge from SnapChat, Instagram, as well as the enhanced video sharing capabilities of Twitter and Facbook and you have demand that is exploding.

In telecom language that means there is a shortage of bandwidth and that spells the need for big investment bucks at the AT&T/Verizon duopoly. Ok, no big deal, it just a matter of money and then getting a return on that investment. Not so fast, here is where the squeeze comes in.

After researching the topic we learned that wireless prices have fallen 13% over the last year. Seems like those “Unlimited Plans” have been wildly popular with everybody but company profit margins and the investors that have been watching.

Ouch! Was this an economic faux pas? In the short run, it may turn out to be but there may have been other considerations like competing against the big cable giants.

On one side of the coin, people have abandoning cable because of its high cost. Yet, under their old plans, for AT&T/VZ to provide enough bandwidth for all that incremental video would certainly have run the average consumer bill through the roof. Either way, the short-term focused stock market isn’t exactly thrilled.

The Hidden Nuggets

If the S&P Telecom Index does go the way of the Sony Walkman, the rules committee at Standard & Poor’s will probably merge it into the Utility Index where it properly belongs. This is where investors will find greater joy.

This is when the overlooked value of AT&T/Verizon will receive greater attention. The value is in the dividends. Both stocks sport hefty 5% dividend yields. And they have enough cash to continue growing the payout in the years ahead.

These two stocks may not be as risk free as the 10 Year US Government Note but these days the government is only offering about 2.2% and the government is over $20 trillion in debt.

We aren’t in the business of making investment recommendations, just observations. You can, and should, consult a qualified investment advisor for their recommendation. With a new unlimited plan, you can talk to them all you want. You can even share photos.