Data demand makes telcos taste sweeterPUBLISHED: 14 hours 35...

Data demand makes telcos taste sweeter
PUBLISHED: 14 hours 35 MINUTES AGO | UPDATE: 11 hours 14 MINUTES AGO
John McDuling

Over the last few weeks, unsettling signs that global markets are heading into another period of instability have emerged.

The recovery in the United States has stalled. Europe remains a fiscal basket case, and even the recent engine of global growth, China, appears to be slowing down.

Australian investors re-evaluating their portfolios weeks into the new financial year and looking for a place to hide are not blessed with an abundance of options. The local corporate bond market is underdeveloped, government debt is inaccessible, and with the RBA expected to cut interest rates again next month, even cash has its drawbacks.

The equity markets might seem like the worst place to seek solace, but one sector on the local bourse that has proved remarkably resilient amid recent turmoil has been telecommunications.

In the recently completed financial year, telco stocks were up 27 per cent compared to the 11 per cent slide in the broader market, and that’s before the generous yields on offer in the sector are even taken into account.

“Investors increasingly are looking to equities to supplement yield they are losing elsewhere,” Watermark Funds management portfolio manager Justin Braitling explains.

“With cash rates where they are, a highly visible dividend yield just becomes more valuable.”

Shares of Telstra, arguably the ultimate yield stock, surged 28 per cent in the 2012 financial year, with demand for its annual 28¢ dividend coinciding with an explosion in demand for smart phones and tablet devices. “They are in a bit of a sweet spot at the moment, offering a service everyone wants, with data consumption doubling every year,” Braitling says.

“The competitive structure is also favourable with Optus going south and Vodafone in all sorts of trouble.”

Notwithstanding recent mobile growth, the undisputed driver of Telstra’s share price has been its 28¢ dividend. Recent analysis by Deutsche Bank found there has been a near perfect correlation between the stock and the 10-year government bond rate over the past 12 months.

The question for investors in Telstra is ultimately whether the dividend is sustainable. For the next few years, that seems a safe bet. The telco has $11 billion coming in the door over the next decade as a result of its deal to transfer assets to the national broadband network – payments that seem secure even if there is a change in government next year.

Over the longer term, Telstra faces a challenge in mitigating the impact of ongoing declines in its high margin, fixed line phones and directories revenues, through growth in mobiles, cloud computing and digital media. But any threat posed by this changing earnings mix to the dividend is still years away.

Elsewhere in the sector, Singapore Telecommunications (which owns Optus) is often overlooked, but offers a 4.7 per cent yield and the prospect of exposure to fast growing emerging markets. Perth-based iiNet, whose shares flirted with a seven-year high this week, has through a series of shrewd acquisitions built itself up to be the country’s second largest internet service provider, and has achieved growth in dividends for four straight years. TPG Telecom and M2 Telecommunications are also worth a look.

For those investors with a little more appetite for risk, emerging telcos also offer the prospect of growth. “We don’t have a lot of growth sectors in Australia but emerging telcos and facilities builders like Amcom Telecommunications and NextDC, these stocks are doing well,” Braitling says.

“These companies are well positioned to take advantage of a favourable environment due to rising data consumption, where they can deliver double digit earnings growth without a lot of risk.”


The Australian Financial Review