The telecommunications industry is identified as a major driver of the global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, primarily for wireless data and video, has transformed the industry into a most evolving, inventive and hotly contested space.
Momentum Continues
Telecom operators globally generated approximately $2 trillion in revenues in 2013, highlighting slight improvement from $1.9 trillion revenues recorded in 2012. According to a research report by Telecommunications Industry Association (TIA), the global telecommunications industry spending rose 5% in 2013 to $5.1 trillion.
Notably, the U.S. telecom industry spending rate (6.6%) had surpassed the global spending rate (4.5%) in 2013. Interestingly, this reverses a long-term telecom spending pattern that prevailed throughout the world. The TIA has also estimated that the U.S. wireless operators will spend $36.3 billion on network infrastructure and equipment in 2014, signifying an improvement of 8% year over year.
5 Broad Factors
Currently, the U.S. telecom industry is evolving around five broad factors: (i) the increasing traction of wireless networks in the telecom industry and the consequent popularity of spectrum (ii) the projection of aggressive high-speed fiber-based network expansion especially for video/TV offerings (iii) consolidation within the industry, which is likely to continue mainly on airwaves shortage and attainment of economies of scale (iv) innovative product launches are expected in areas of m-Commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few and (v) ample scope for expansion as nearly a fifth of rural American households lack broadband access, as per the Federal Communications Commission (FCC).
Our Top Picks
While the telecom growth momentum is expected to be maintained in the U.S. over the near term, the major impetus is likely to come from the emerging markets of Asia-Pacific and the Latin American region. At this stage, we believe investors should choose stocks which promise strong dividend yield and carry a favorable Zacks Rank to cash in on future growth. Taking into account these factors, we present four such stocks for investors to consider:
China Mobile Ltd. (CHL): The largest telecom operator in the world with respect to subscriber count currently sports a Zacks Rank #1 (Strong Buy) with a dividend yield of 3.15%. China Mobile serves nearly 791 million subscribers of which around 14 million are 4G LTE-TDD customers. This implies the company has a massive growth potential for its LTE network which will help it to raise its average revenue per user.
The company has ample liquidity of around RMB73.9 billion ($12 billion). China Mobile maintained its 2014 capital expenditure budget at RMB225 billion ($36.5 billion) as the operator aims to speed up 4G rollout and customer acquisitions.
NTT DoCoMo Inc. (DCM): The largest wireless operator of Japan offers both 4G LTE and 3G WCDMA network technologies and serves over 22 million LTE subscribers. The company is expanding its global reach through strategic joint ventures and other alliances with mobile and multimedia service providers in the Asia-Pacific region, Europe and North America. NTT DoCoMo currently carries a Zacks Rank #2 (Buy) and provides a dividend yield of 3.05%.
SK Telecom Co. Ltd. (SKM): In Jun 2013, this South Korean wireless operator became the first wireless carrier in the world to commercially launch LTE-Advanced network using the carrier aggregation methodology. At the end of the second-quarter of 2014, the company had 27.9 million subscribers, out of which 15.4 million are LTE subscribers. This Zacks Rank #2 stock currently offers a dividend yield of 2.48%.
Cellcom Israel Ltd. (CEL): Cellcom is the largest wireless service provider of Israel, serving more than 3 million subscribers. The company offers a broad range of value added services which include mobile and fixed-line telephony, roaming services for tourists in Israel and for its subscribers abroad. In Jul 2014, Cellcom launched its 4G LTE network. Management is considering the fast deployment of LTE-Advanced network also. Cellcom currently carries a Zacks Rank #2 with a dividend yield of 2.14%.
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