For Immediate Release
Chicago, IL – March 21, 2018 – Today, Zacks Equity Research discusses the Telecom, including T-Mobile US Inc. (TMUS - Free Report) , Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) , Sprint Corp. (S - Free Report) and Comcast Corp. (CMCSA - Free Report) .
Industry: Telecom, Part 1
The U.S. Telecommunications industry had a disappointing 2017. However, signs of improvement were apparent from fourth-quarter 2017 with most of the major telecom stocks starting to perform well. Notably, all four national wireless carriers have gained postpaid subscribers in the last reported quarter.
Postpaid customers are those billed monthly and considered more profitable to telecom operators. Interestingly, all five major wireless operators have gained considerable postpaid customers despite cut-throat pricing competition in the industry resulting in unlimited data plans with several sweeteners. We believe this trend is likely to continue in 2018.
T-Mobile US Inc., Verizon Communications Inc., AT&T Inc. and Sprint Corp. have gained substantial postpaid customers. Additionally, a new entrant in the wireless space, Comcast Corp., a cable MSO (Multi Service Operator), also gained significant postpaid subscribers. Each of these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Upcoming 5G Wireless Network
Fifth-generation (5G) superfast wireless networks will provide primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for the U.S. wireless carriers. Per a report by research firm iGR, U.S. telecom operators will spend around $104 billion between 2015 and 2025 to upgrade existing 4G networks to the upcoming 5G standards and consequently, execute full installation of 5G wireless services.
We expect wireless networks to provide primary impetus to the telecom industry. In this regard, Internet of Things (IoT) has the potential to emerge the number one factor for future growth in the space. According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT will grow at 19.2% compound annual growth rate to nearly $1.7 trillion in 2020 from $698.6 billion in 2015.
Several positives have emerged for the industry since the last quarter of 2017. President Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas – a significant cut in the corporate tax rate and deregulation – are major catalysts to the U.S. economy. Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term. We believe that Telecom will be one of the major beneficiaries of this policy change.
On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (“FCC”) repealed the Net Neutrality laws that it had imposed under the Obama administration. There is little doubt that the ISP industry will be the major beneficiary after the repeal of Net Neutrality. Lenient regulatory attitudes at the current FCC may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.
The proposal to reduce corporate tax rate from 35% to 21% would be immediately accretive to cash flowof the telecom carriers. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and deployment.
The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years, along with the above-mentioned policy changes, are likely to spur higher consumer spending.
High Dividend Yields
One of the easiest ways for any company to raise shareholder wealth is to hike the dividend rate. Telecom companies offer one of the highest dividend yields in the U.S. economy.
Typically, well established, profitable companies pay dividends. Investors seeking income-producing (dividends) stocks are well served by growth and income-oriented companies, i.e., companies with stable earnings growth that pay a solid dividend.
Unlike other industries, U.S. telecom operators generate 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. As the U.S. economy is growing steadily, supported by strong data of various macro-indicators, many of these large companies are likely to generate massive cash but because of their size, may not have growth opportunities they once had. For that reason, high dividend-yielding companies will be attractive for investors.
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