Investors buy into the telecommunications sector with high hopes of big dividends, capital gains and hearty cash flows.
With such a large proportion of the global population reliant on their mobile phone devices and internet connection, what could go wrong?
It turns out, plenty.
The telecommunications sector took a beating in May 21 trade, with the S&P/ASX Telecomms (INDEXASX: XTJ) falling 14.5 points to close at 1,041 – a 52 week low after a solid 12 months of declines.
Telstra Corporation Ltd (ASX: TLS) yesterday clocked its third major outage in three weeks with millions of customers left unable to make calls or use 4G data services due to a service disruption.
Telstra shares closed at $2.80 on May 21 – a 52-week low for the stock and a drop of 37% from $4.49 at this time last year – a precarious place for Telstra to be as we edge closer to the release of 5G technology which will see competition ramp up spectacularly in the sector.
The telco giant is taking hits from many different directions at present, with the NBN roll out gobbling up market share in the broadband services space and competitors keen to knock Telstra from its long-held pedestal announcing data package offerings Telstra is forced to match, with TPG Telecom Ltd (ASX: TPM) looking to be the most gutsy peer as we head into 5G territory.
All of this equates to per customer revenue reduction which is not something Telstra can withstand and the stock is now at a seven-year low – Telstra shares are down 1.7% at the time of writing to $2.75.
Telstra CEO Andrew Penn told the JP Morgan TMT Conference earlier this month that the global telecommunications industry was in the midst of a "critical time" with competitive intensity in the Australian market increasing "substantially" as the company floundered with average revenue per unit (ARPU) down 3.6% on mobile and 2.4% on fixed in the second-half.
Telstra's third quarter trading update on May 15 downgraded EBITDA guidance to "the bottom end of the range" with challenging conditions flagged to continue right through to FY19, but FY18 dividend of 22c per share reaffirmed.
But according to The Australian, analysts are openly questioning the assumption that the expected dividend will come to pass, with sell notices for both Telstra and TPG from several sources as brokers see unlimited as a risky way to net customers who will simply move on when the deal expires.
The Australian today reported Telstra is forecast to cut its dividend as low as 14c per share.
As Telstra flails, ambitious $4.94 billion market cap company TPG has certainly come into the game strongly, but as yet has failed to impress shareholders with its financials, as half-year results released in late March included an uninspiring EBITDA increase and conservative guidance upgrade for FY18 to between $825 million and $830 million.
Loyal telco investors may now look to the more speculative pick of telecommunications and hosting company Macquarie Telecom Group Ltd. (ASX: MAQ) – whose shares have climbed steadily in the last 12 months, up 1.6% to $19.00 at the time of writing from just $13.55 at this time last year.
The $394 million small cap probably has some pretty good growth prospects in it, but as yet, it has not asserted itself as a serious player in the telco mobile space, being more focused on hosting services for business and government.
Foolish Takeaway
Investors who have been in the telco space for years have grown accustomed to stable dividends and steady growth, but this dynamic industry is facing serious headwinds as companies struggle to keep pace with technological advances and customer expectations. While its likely such fierce competition will keep the likes of Telstra honest, it probably won't do much for earnings growth and its days as a monopolising giant could be coming to an end fairly soon. Be wary and be prepared.
