Telecommunications is one of the few industries to have undergone rapid technological improvement even during the recession. An era of digitization and technology has essentially been built on the very human need to remain connected. It is in this context that telecommunications comes to the fore as a necessary utility. The rising demand for technologically superior products has given a silver lining to the telecom industry in an otherwise tough environment.
Cutting across barriers has become common among telecom players. The objective is to offer better service and customer convenience. In Feb 2015, AT&T Inc. (T - Analyst Report) launched a service which allows its prepaid GoPhone customers, on $60 data plans, the benefit of unlimited calling from the U.S. to Mexico without any additional charge. The company’s postpaid customers on World Connect Value plans can also avail unlimited calls to Mexico with a $5 add-on.
Meanwhile, T-Mobile US Inc. (TMUS - Analyst Report) introduced an innovative “Mobile Without Borders” plan through which its subscribers will be able to make calls to Canada and Mexico without paying any roaming charges. America Movil S.A.B. (AMX - Analyst Report) has also unveiled a pan-North American roaming charge free calling facility covering Mexico and the U.S. which will be extended further to Canada.
In Apr 2015, Sprint Corp.’s (S - Analyst Report) prepaid service division – Boost Mobile – launched an unlimited voice call and text message service plan to enhance connectivity between U.S. citizens and their friends and family in Cuba.
In Mar 2016, Verizon Partner Solutions, a division of U.S. telecom behemoth Verizon Communications Inc. (VZ - Analyst Report) entered into an agreement with Cuba’s state-run telecommunications company Empresa de Telecomunicaciones de Cuba (ETECSA) to offer direct roaming mobile interconnection services between the two countries. Notably, in Sep 2015, Verizon became the first U.S. telecom operator to offer roaming wireless services in Cuba.
AT&T recently entered into an agreement with Cuba’s ETECSA to offer direct roaming mobile interconnection services between the two countries. With this agreement, AT&T customers will soon be able to connect through talk, text and data while in Cuba. The date of commencement and pricing of these services will be declared later on.
Strong Dividend Growth
Telecom companies offer one of the highest dividend yields in the U.S. economy. The dividend yield, measured as dividends paid by a company in the last 12 months relative to its share price, is currently around 5% for the telecom sector compared with a mere 2% (approximately) for the benchmark S&P 500 index.
Unlike other industries, U.S. telecom operators generate their revenues predominantly in the country. This makes these stocks less susceptible to volatility in the foreign exchange rate as well as macro-economic fluctuations plaguing the rest of the world. We believe the strong dividend yield momentum will continue as the U.S. economy slowly stabilizes.
The telecommunications industry as a whole offers a number of positives that are difficult to disregard from the standpoint of investors.
- Immune to External Disturbances: A major characteristic of the telecommunications industry is that it is immune to any international geo-political disturbance even when it leads to economic fluctuations. Thus, the ongoing sovereign debt crisis in Europe, the slowdown in China or other non-U.S. economic volatility is not expected to have any immediate impact on the industry.
- Barriers to Entry: The lack of public airwaves (spectrum) in the telecommunications industry creates a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with large carriers. Furthermore, it is not easy for a new telecom carrier to establish itself in the market as it requires government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and are therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Thus, this barrier protects the profits of incumbents in the telecom space.
- Strong Demand: A recovering economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. Moreover, the FCC projects mobile data demand to grow 25-50 folds over the next five years.