Investing In The Telecommunications Sector
The technology that enables you to read this blog online is provided by the telecommunications sector. Since the pandemic began, the world has started realizing the value of the internet. Everything is available online now and many companies prefer operation online only as it helps in cutting costs and expenses. This online medium is only available due to the internet services provided by the companies operating in the telecommunications sector. Hence, you can estimate the jump which such companies have taken in the past couple of years. Leaving the pandemic aside, the telecom industry has been one of the fastest growing industries of the world in the past decade. The evolution of wireless communication and data has been one of the significant developments of the modern world. There are various aspects of this industry which we will be covering in detail here.
Why Invest in the Telecom Sector?
- DEREGULATION OF THE SECTOR
Early on, the telecom industry was controlled by most of the governments in most developing nations. But, this sector has been deregulated and liberalized in the past few decades. This has given a significant boost to the sector. The opportunities for this sector are rising day-by-day.
There has been a great amount of innovation in the telecom sector in the past decade. This is the result of the capital invested by the companies in the R&D department. The biggest example of innovation is the evolution of wireless technology, which has resulted in the development of wireless communication software and devices. The second big thing is the evolution of internet services and provision of data services. 5G and 6G are the new things, which have to be looked into by companies in this sector.
- DIVIDEND-PAYING STOCKS
Fifty percent of the total stocks are dividend-paying stocks in the telecommunications sector. Investing in these stocks might help you earn a fixed income in the form of dividends besides providing capital gains.
The sector has equity stocks which provides investment opportunities for growth, income and value investors. There are stocks that provide regular dividends and there are stocks which also provide capital appreciation. There are many underrated stocks as well which have great future prospects. All these stocks need to be identified carefully.
- DEPENDENCY ON INTERNET
The internet has been the medium of virtual settings taking place in any sector. The Internet is the foundation of everything which takes place in the online medium. Everything in the modern world is dependent on the internet and its dependency is increasing day-by-day. The provision of internet services is in the hands of the blue-chip companies of the telecom sector.
- VARIOUS CHOICES FOR INVESTMENT
i. Equity stocks
This includes direct investment in the stocks of various companies.
Example: Verizon Communications (NYSE: VZ)
ii. Exchange-traded funds (ETFs)
These are a collection of stocks, which track a particular index.
For example, Fidelity MSCI Communication Services Index ETF (FCOM) – tracks the majority of the telecom companies across the sector
iii. Mutual Funds
These are funds, which track a particular set of stocks of the telecom sector. Investing in mutual funds diversifies the risks of the portfolio.
For example, Fidelity Select Wireless Portfolio
Participants in the Telecommunications Sector
There aren’t many participants in the telecom sector. This implies less competition and huge growth opportunities. Major blue-chip stocks dominate this sector but there are small-cap companies as well which are showing a good growth potential. These companies are classified into diversified and wireless communication services.
Let us have an overview of the participants in the sector.
Telecom Stocks to Look Out For
The companies in the telecom sector are involved in these major segments.
- Wireless communications
- Communications equipment
- Long-distance carriers
- Domestic telecom services
- Foreign telecom services
- Diversified communication services
Here is a list of a few exciting stocks to look out for. These stocks are the stocks of blue-chip companies in their respective sub-sectors:
- Verizon Communications (NYSE: VZ)
Verizon Communications is the largest wireless carrier in America. It is an American Multinational Corporation headquartered in Midtown Manhattan. Its market capitalization is $233.04 billion and it’s a dividend-paying stock. Its dividend yield is 4.46%.
- AT&T Inc. (NYSE: T)
It is the world’s largest telecom company and the second largest provider of mobile telephone services. Its headquarters are in Texas. Its services and products include satellite communication services, internet services, broadband, etc. Its market capitalization is $212.13 billion and its dividend yield is a whopping 7%.
T mobile is an American wireless network operator, with its headquarters in Washington, US. Its market capitalization is $176.2 billion. It does not pay out dividends. Its aim is to make the customer’s life easier with a curated collection of convenient apps and services.
Qualcomm is an MNC with its headquarters in California. It creates and ideates software related to wireless technology. Its market capitalization is $144.8 billion. It is a dividend-paying stock, and its dividend yield is 1.89%.
(NOTE: These stocks are not recommendations made by us. It is just a list of stocks of a few industry leaders that are diversified in different sub-sectors. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.)
One has to consider the various fundamental aspects of the company before investing in the telecom sector. I have listed down a few criterias on which an investor should focus before deciding whether to invest in a telecommunication company or not.
- Huge Free Cash Flows
- Investment by the company in R&D
- Price to Sales ratio
- Efficiency Ratio
- Growth in the share price of the company in the past few years
- Healthy Balance Sheet
The companies in this sector usually have very low or no retained earnings. There are various reasons behind this. All the companies have outperformed in the past few years because of the strong fundamentals and the growth potential, which they show. Hence, the fundamental aspect becomes very important which needs to be looked into before investing.
This sector has attracted investors for the past few decades, and now it has become a part of a majority of the investors’ portfolios.
MarketXLS has a blog on the topic 5G penny stocks. If this topic interests you, click here to directly go to the blog.
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