There was a time when the telecoms industry positioned itself as the backbone to the new economy of the internet and investors queued up to pile in. Companies like Vodafone saw incredible growth in the late nineties alongside internet service providers like Tiscali (remember them?) and when Vodafone paid upwards of £110bn for Mannesmann, the industrial conglomerate with designs to move into telecoms, it was the acquired company’s shareholders itching to accept that pushed the deal over the line.
The world was terrified to miss out on the internet revolution and the companies at the heart of the movement could do no wrong. So, it’s not difficult to see why investors have had a rather delicate relationship with the telecoms sector since the dot.com party ended in 2000.
When we look at what actually went wrong, apart from the heady behavioural biases on show, we tend to arrive at two main factors: growth expectations and market competition. Shares were priced for continued growth and the market was ready to ignore huge price-to-earnings valuations because of the feeling this was a new paradigm that normal valuation methods couldn’t tackle.
Competition brought device and service prices right down and regulators weighed in to phase out network-to-network surcharges. The whole scene brought investors back to earth with a bump and even now many shy away from telecoms as a result. If the sector is going to be truly attractive once more, there need to be clear breaks with the past and more realistic fundamentals to get investors excited again.
So has anything changed?
Well everything’s a lot cheaper for a start. Valuations are a fraction of what they once were and most telecoms companies now offer a decent dividend too. Their values were tied to the fortunes of the high growth internet stocks in the dot.com years but two decades on, arguably they have matured into dividend compounders. Making sure they can cover their dividends well is top priority now.
The spectre of the bust might still loom over the industry but the reality is that, while we all turned our attention away from the sector, it was slowly but surely repairing the foundations. Companies have finally embedded themselves into the fabric of an increasingly connected world, as investors once hoped they would.
While tech companies like the FAANGs grab the headlines, the relationship between digital-first business and telecoms operator couldn’t be more different. The internet is no longer just a useful tool and investors are becoming increasingly drawn to a future in which superfast broadband is absolutely essential to the world economy, regardless of the businesses operating on it.
What to keep an eye on
Over the past 10 years, the time we spend consuming digital media has grown enormously. On average we spent 2.7 hours a day online in 2008, compared to 5.9 hours today - with over 50% of that time spent on our mobiles1. The trend shows no sign of stopping so it might start to become a case of finding reasons why we wouldn’t want to be part of the story.
That will be very hard for those still nursing post-2000 burnt fingers to accept but we aren’t in a world of 10p texts anymore.
More than just propping up internet connectivity, the move from telecoms operators into providing us with a fixed and mobile tariff, TV and broadband all in one package is certainly an area to watch. Nicknamed ‘quad play’, the one-stop-shop model makes for a stickier consumer base, especially when we factor in family data deals and simpler pricing.
So, just as the digital world looks very different now from the tech bubble years, so do the companies that survived. Their ability to evolve and adapt to suit customers’ needs is paramount and with lower valuations to begin with, investors are taking a second look.
What’s a good way to invest in telecoms?
Vodafone, BT and Orange are the sector’s familiar names, for those looking for direct access to telecoms via company shares, and are the names that crop up most in fund managers’ allocations to the sector too.
For those seeking a diversified approach to investing, the Fidelity Select 50 list of preferred funds has a range of portfolios with telecoms exposure. The JOHCM UK Equity Income Fund has Vodafone among its top holdings, while the Invesco European Equity Income Fund and Invesco Global Equity Income Fund both count Orange in their top 10 names.
1 Mary Meeker’s 2018 Internet Trends Report
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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