A very interesting news story originating from Bloomberg about telco stock values snuck under the radar recently. In essence it stated that the search for higher yields is driving the biggest rally in seven years for telco stocks, as investors ignore some of the lowest profit forecasts in the MSCI World Index.
Verizon Communications Inc. In the U.S. and PCCW Ltd. In Hong Kong are leading a 21 percent gain in MSCIâ€™s gauge of 52 telecommunications companies since the end of the second quarter even as analysts estimate that the groupâ€™s earnings will grow at less than half the pace of the MSCI World measure of stocks in 24 developed nations, data compiled by Bloomberg show. U.S. phone shares are the most expensive industry in the Standard & Poorâ€™s 500 Index relative to forecast profits, the data show.
With the MSCI World rising 3.6 percent in 2010 and corporate debt offering the lowest yields on record, investors are sacrificing the prospect of faster earnings growth for the current income of telecommunications stocks. Artemis Investment Management LLP, BlackRock Inc. and Fifth Third Asset Management Inc. are buying phone shares as dividends of companies from Royal KPN NV to AT&T Inc. yield more than their bonds amid signs that the U.S. economy is slowing.
Telephone companies account for 5 of the 10 largest dividends in the benchmark gauge for American equities and yield 5.44 percent as a group, based on data compiled by Bloomberg. As a group, utilities offer the second-highest payouts in the S&P 500 at 4.25 percent. Verizonâ€™s 28 percent rise since the end of May has pushed the New York-based companyâ€™s share price to 14.5 times reported income, the highest level since June 2008. The carrier will have its biggest drop in earnings since 2003 this year, according to analystsâ€™ estimates compiled by Bloomberg.
And all this has come when profits at telcos have generally leveled or declined as consumers eliminate home-phone lines in favor of mobile devices and voice service from cable providers. The industry also faces less demand from businesses and slowing growth from wireless phones in most developed markets and high growth accompanied by low ARPU, intense competition and high capex overheads in the emerging markets.
So the news for our industry does not seem that bad as investors continue to feel some comfort level from higher than average dividends. These appear to provide adequate consolation for lower profits and stock prices.