Suffice it to say that the Telecommunications Services sector of today is not your grandfather’s Telecommunications Services sector. The explosion, and rapidly becoming ubiquitous implementation, of wireless technologies have been disruptive and game changing. As a result, the very nature of the established stalwarts within this industry have gone through an extraordinary metamorphosis. As wireline has given way to wireless, virtually every company in the Telecommunications Services sector has been forced to change their business models to align themselves with contemporary phone, Internet and cable offerings.
Included in the transformation of every company in this industry has been a massive amount of merger and acquisition activity. Moreover, these massive changes have required the major players to make massive capital investments in order to position themselves relevant in the rapidly-changing Telecommunications environment. Although this industry has always been capital-intensive in nature, the metamorphosis of wireline to wireless has, temporarily at least, increased the need for huge additional capital injections. Therefore, generating profitability over recent history has been a challenge.
On the other hand, there are early signs that these significant investments may pay off in the future. As a result, prospective dividend growth investors interested in investing in this sector would be well-advised to focus more on the future, while ignoring much of what has happened over the recent past. Perhaps for this sector at least, it may well be different this time.
Generally speaking, the Telecommunications Services sector consists of companies that provide wireless and wireline telephone and data services; cable and satellite television distribution services; and Internet access. According to Hoovers reporting in their
Telecommunications Services Industry Overview, the major sources of revenue for the Telecommunications Services sector are wireless services (39 percent of industry revenue); wireline services (33 percent of industry revenue); and cable distribution (24 percent).
Clearly the metamorphosis has significantly progressed; however, it’s important to note that wireline services remain an important part of this industry’s cash flow generation. Moreover, with earnings growth prospects still ill-defined, many managements are focused more on managing cash flows than earnings. Until the changes are complete and the industry’s future more defined, cash flow will be more important regarding maintaining their operations, maintaining their dividends, and perhaps paying down debt and buying back stock. The maintaining of dividends is the most important focal point of this article.
The Telecommunications Services Sector
This is the tenth in a series of articles designed to find value in today’s stock market environment. However, it is the ninth of 10 articles covering the 10 major general sectors. In my first article, I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.
My first article was titled “Searching For Value Sector By Sector,” my second article was titled “Finding Great Value In The Energy Sector.” My third article was titled “Finding Value In The Materials Sector Is A Material Thing.” My fourth article was titled “The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income.” My fifth article was titled Beware The Valuations On The Best Consumer Discretionary Dividend Growth Stocks, and my sixth article was titled, Are Blue-Chip Consumer Staples Worth Today’s Premium Valuations?, my seventh article For A Healthier Portfolio – Look Here, my eighth article Is The Financial Crisis Over For Financial Stocks?, and Improve The Productivity Of Your Dividend Growth Portfolio With Technology.
As a refresher, my focus in this and all subsequent articles will be on identifying fairly valued dividend growth stocks within each of the 10 general sectors that can be utilized to fund and support retirement portfolios. Therefore, when I am finished, the individual investor interested in designing their own retirement portfolio should find an ample number of selections to properly diversify a dividend growth portfolio with.