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Why Telecommunications Stocks Jumped on Tuesday

By Travis Hoium - Updated Mar 17, 2020 at 3:45PM

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There may be some hope for some telecommunications stocks.

What happened 

Shares of telecommunications and related infrastructure stocks had a great day Tuesday as the market sought relatively safe investments during the coronavirus outbreak. American Tower Corp (AMT 1.29%) jumped as much as 15.9%, Centurylink Inc (LUMN 2.92%) rose as much as 13.8%, and Verizon Communications Inc. (VZ -2.17%) jumped as much as 8.9%. At 3:30 p.m. EDT shares of each company were up 13%, 9.3%, and 5.7% respectively. 

So what

The stock market overall is up today, so that's helping the telecommunications industry broadly. And there may be some flight to safety, with investors viewing telecommunications as a critical consumer good at the moment. 

Group of people using smartphones.

Image source: Getty Images.

More consequential long-term will be Verizon going to the market with a $3.5 billion bond offering that will be the first major offering this week. Verizon is trying to take advantage of ultra-low interest rates to lower financing costs for its business

There's also news that the Trump Administration and some members of Congress are pushing for a $1,000 check to go to every American adult as a result of the economic impact of coronavirus. This money could be used by consumers for everything from rent and groceries to paying a phone bill. 

Depending on how long the coronavirus pandemic lasts, there could be a large economic impact with workers in service industries like restaurants and bars feeling the impact first. These are workers who telecommunications companies count as customers, so if the economy goes south so could earnings. 

The impact on small businesses could be large as well and that's who Centurylink is focusing its growth on. If companies go out of business or cash is crunched, it could see an impact. 

For today, investors are betting that lower rates and the potential for a government check will mitigate the potential impact of coronavirus on the economy. 

Now what

One thing I would caution against is assuming that high dividend payments will last. I think the telecommunications business is going to be stable even in a crisis, but if cash flow declines the dividend will be one of the first things to be cut. Centurylink's current yield of 10.2% seems most concerning if there's a meaningful impact on business. 

I wouldn't panic sell telecommunications stocks right now given their relative stability in the market. An economic downturn would affect business but that will be the case with any company. And if the economic impact isn't as bad as feared, this may be a low point for telecommunications stocks. 

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.96 (-2.17%) $-1.13
American Tower Corporation Stock Quote
American Tower Corporation
AMT
$261.65 (1.29%) $3.34
Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$11.27 (2.92%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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