Introduction: The Evolving Sector
Before the arrival of the Internet and the other data networks, telecommunication technology had a solid stay in the market. The primary application of this technology was the telephones which enabled people to communicate at a distance by voice, and the telephone service provider was the public switched telephone network (PSTN).
Back then, many of the U.S networks were operated by American Telephone and Telegraph (AT&T). Later, around 1960s, new services were added by the PSTN, allowing users to communicate from distant places. Other distance communication mediums such as video conferencing, e-mail, instant messaging, etc. expanded as well. Also, the technologies used for distance communications have changed drastically over the last 50 years.
What is the telecommunication sector?
The telecommunication sector is comprised of those companies that enable people to communicate all across the globe, be it through phone or internet, wired or wireless. These companies are involved in the creation of a framework which allows data to be sent anywhere in the world in the form of words, audio or video. The different types of companies in this sector include wireless operators, cable companies, satellite companies, and ISPs (internet service providers).
The telecommunication sector can broadly be divided into two subsectors, namely, equipment sector and the service sector. As the name suggests, equipment sector companies manufacture telecom products, and the service sector companies are the service providers who take control of the communication operations. Let us understand each subsector in detail.
Telecommunication equipment Sector
These are the companies which are involved in the production and development of products which are necessary for communication to take place. Consumers access these products to facilitate telecommunication services. The manufacturing equipment includes satellite and broadcast network equipment, wireline telecommunications equipment, wireless telecommunications equipment, and computer networking equipment.
Telecommunications Services Sector
This sector includes companies that provide various services to end customers, such as telecom service, broadband service and intermediary services.
The Telecom service sector can be further divided into:
This subsector provides direct communication services to users, like fixed telephone, broadband, and cable network services. It primarily builds and also maintains land-lines and satellite link-ups. These companies also offer non-voice communication, such as telegraph.
This is the most growing subsector in the present world as their services are very efficient for users. They offer services such as cellular mobile phones, paging, broadband, communication, satellite, and wireless public safety services as well. In order to provide all these services, it operates and maintains switching and transmission facilities. This subsector also supplies and maintains the equipment to receive signals.
This subsector provides wired, wireless, and broadband internet services. The companies that provide this service are called internet service providers (ISPs). Some ISPs also provide services such as web page designing and web hosting.
As the name quite suggests, these companies lease transmission facilities such as space on satellite and telephone lines from already existing telecom networks, and resell the services to other customers.
These companies provide television and other services to the customers on a fee or subscription basis. They transmit programs to the customers over fibre optic and coaxial cables.
Other Broadband services
These firms provide wired or wireline broadband services that are not included in the internet services. They provide services such as Internet Protocol Television (IPTV), Internet Protocol virtual private network (IP VPN / VPN), and Voice over Internet Protocol (VoIP).
Telecommunication Sector in the Stock Market
Now that we have some knowledge about the telecom background, let’s take it forward and discuss its status in the Stock Market. The telecommunication sector comes under the classification of stocks based on the sector they belong to. There are about eleven sectors in the market, including the telecommunication sector. Sectors apart from telecom include Financials, Consumer Discretionary, Consumer Staples, Utilities, Energy, Healthcare, Industrials, Technology, Materials, and Real Estate.
Investing in the Telecommunication Sector
- This sector is relatively unique and different; as the telecom stocks have traits of both income and growth stocks. These companies typically generate reliable dividends when companies are given regulatory privileges. However, during merger and acquisitions or technological advances, they become unpredictable.
- The telecommunication sector is an integral part of a country’s economy. Whatever be the changes in the business cycle, the demand for this sector is unaffected. When there is an advancement in the technology (like an evolution from wires to wireless networks), an investor can consider it as an excellent opportunity to pour in their capital into the stock; given its fundamentals remain strong.
- These companies are always applauded for their steady dividend payment to their investors. Also, they regularly raise the dividend as well, attracting many income stocks investors.
- However, investors must be a little cautious while investing in the telecom sector, as this sector is quite volatile compared to other sectors. Investors can expect significant gains from the sector during the bull market, but, during a recession period, an investor may perhaps get hit with severe losses.
Three best telecom stocks to invest in
- Verizon Communication
Verizon is the largest wireless network company in America, having around 150 million subscribers. It has a market capitalisation of $220 billion. It owns the fibre-optic network. It is also one of the largest digital content providers on the internet. This company earns steady revenue even during market declines.
AT&T is the number 1 cellphone carrier. This is telecom company is known for its stable dividend payment. For example, it has been increasing its payouts consistently for the past 34 years.
- China Mobile Ltd.
This is the largest wireless network in the world as measured by the number of customers, accounting 900 million customers. This too falls in the basket of companies having a market cap of $200 billion. There are risks involved in investing in this company, as it is government driven. However, it is attractive to investors because it is a blend of both income and growth stocks.
Other large telecommunication companies include Telefonica, BCE, CenturyLink, Crown Castle International, Vodafone Group Plc, Nippon Telegraph & Telephone Corp., Softbank Group Corp., etc.
Exchange-traded funds offer an alternative to investors who are not willing to invest in the stocks directly. Every sector has its ETFs to invest in. So does the telecom sector. Some of the ETFs are given below.
- The Vanguard Telecommunication Services ETF
- The iShares Dow Jones U.S. Telecommunications Sector Index Fund
- The iShares S&P Global Telecom Fund
The ETFs mentioned above are mostly composed of all types of telecom stocks, ranging from small telecom first to large firms like Verizon, AT&T, Sprint, China Mobile, etc. Therefore, investing in ETFs is a worthy choice as it makes your portfolio pretty diverse and safe.