For most investors, maintaining a diversified portfolio is a good way to help minimize risk and sleep better at night while also making sure that they don't miss out on winning sectors.
Diversification can mean many things -- small versus large stocks, value versus growth stocks, and so on -- but most often it's taken to mean spreading your bets among a variety of industries. Of course, just because you want to have some exposure to a variety of industries doesn't mean that you want to have the same amount of exposure to all industries.
So what of the telecom sector? Should we be digging in or pulling back right now? Let's take a look.
Performance
Here's a look at how performance has broken down among the S&P 500 industries:
|
Sector |
Month-to-Date Performance |
Quarter-to-Date Performance |
Year-to-Date Performance |
|---|---|---|---|
|
Industrials |
8.23% |
11.81% |
11.81% |
|
Financials |
8.6% |
10.64% |
10.64% |
|
Consumer Discretionary |
7.37% |
9.72% |
9.72% |
|
Consumer Staples |
3.31% |
4.77% |
4.77% |
|
S&P 500 Overall |
5.72% |
4.72% |
4.72% |
|
Health Care |
3.05% |
3.49% |
3.49% |
|
Materials |
8.26% |
3.06% |
3.06% |
|
Information Technology |
6.66% |
1.58% |
1.58% |
|
Energy |
2.04% |
(0.74%) |
(0.74%) |
|
Utilities |
2.14% |
(4.87%) |
(4.87%) |
|
Telecom Services |
6.18% |
(4.96%) |
(4.96%) |
Source: Standard & Poor's as of March 24.
Right off the bat, we can see that telecom has been the worst-performing sector in the S&P 500 so far this year. That could be a good sign, if it means that investors have been ignoring solid telecom stocks as they chase after the industry du jour.
The details
Let's peek under the hood of the major U.S. telecom-service stocks.
|
Company |
Market Cap |
Return on Equity |
Five-Year Average Annual Revenue Growth |
Price-to-Earnings Ratio |
Dividend Yield |
|---|---|---|---|---|---|
|
AT&T (NYSE: T) |
$155 billion |
12.6% |
24.7% |
12.5 |
6.4% |
|
Verizon (NYSE: VZ) |
$87 billion |
8.8% |
10.4% |
23.9 |
6.2% |
|
Sprint Nextel (NYSE: S) |
$12 billion |
NM |
8.3% |
NM |
NA |
|
Qwest Communications (NYSE: Q) |
$9.2 billion |
NM |
(2.3%) |
13.5 |
6.2% |
|
Windstream (NYSE: WIN) |
$5.1 billion |
130.4% |
0.4% |
14.7 |
8.9% |
Source: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.
We can probably further separate these telecom stocks into two groups. AT&T, Verizon, and Sprint all offer both wireless and wireline services on their own networks, while Qwest and Windstream are primarily focused on wireline. This is a key differentiation, because while wireless is still an evolving, if not growing, area, wireline is very clearly on the downslope.
You may think that makes it obvious to look at the likes of Verizon over Windstream, but it's not quite so simple. For the giants jostling for wireless supremacy, competition is tough, and that could mean margin pressure. They also can't slack off when it comes to capital spending as they all rush to claim that they have the best coverage map. Meanwhile, as Tim Beyers recently pointed out, changes in the wireless landscape could make competition even tighter.
And even though wireline businesses are slowly dwindling, shareholders can benefit from Qwest and Windstream's healthy cash flow through dividends. Qwest doesn't pay out as much as Windstream does, but it has reduced its total debt from $17.3 billion in 2004 to $14.2 billion at the end of last year. Continued debt reduction would boost Qwest's bottom line through a drop in interest expense.
Putting it all together
The telecom sector accounts for a very small piece of the overall market pie -- based on market cap, the industry is less than 3% of the S&P 500. So when it comes to your portfolio, you're probably not going to want an overwhelming telecom presence unless you're particularly bullish about the sector. And I don't think you should be.
To be sure, there are good reasons to have some telecom exposure. The dividend yields of the big players, such as AT&T and Verizon, are fantastic right now. Valuations are generally lower than they are in the overall market, and these companies should also show better-than-average stability if the economy continues to stumble along. However, competition is tough, and growth is unlikely to come easy in the mature market of the U.S.
That last point, though, is key. If there's a place to get excited about telecom, it's overseas in emerging economies, where communication is still important but telecom providers aren't as highly penetrated as they are domestically. China Mobile (NYSE: CHL) might jump out because of the crazy growth of China's economy, but investors may also want to consider the telecoms in lower-profile emerging economies, such as Turkcell (NYSE: TKC) in Turkey and Philippine Long Distance Telephone in the Philippines.
The bottom line? I think investors should be at least market-weighted on telecoms, and if they're looking outside the U.S., it could be worth having a little extra exposure.
What do you think? Are you bullish or bearish on the telecom sector? Scroll down to the comments section and share your thoughts.
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