Telecom isn’t your father’s business anymore. It’s time to take a second look at investing in the sector (especially its titanic twosome, AT&T and Verizon) over the near term. Dividend-hungry investors seeking something to hold in the future, however, should look elsewhere.
It doesn’t seem that long ago when telecommunications companies were the virtual standard-bearers for long-term, dividend-friendly, safety-first investments with steady growth potential.
Today’s communications marketplace is an ever-changing technological marvel, and telecom is right in the thick of it. It’s a wireless, connected “Internet of Things” (IoT) world, where the price of those connected “things” like cell phones, PCs, tablets—heck, even a watch—is coming down to commodity status, meaning a squeeze on revenue growth.
Meanwhile, the explosive growth in wireless video streaming is putting enormous pressure on companies to expand their networks at as rapid a pace as possible.
Indeed, building an ecosystem around wireless technologies is the key to monetizing a growing market that Deloitte estimates can add $150 billion to the U.S. GDP within the next few years.
All of this means telecom companies need to find growth anywhere to generate fresh revenues, and it isn’t easy.
Acquisitions are extraordinarily costly, while investing in new infrastructure projects and updating existing systems can suck the life out of cash flow.
By virtually any standard (most certainly market cap and revenues), AT&T, Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) are the telecommunications leaders in the U.S. They’ve also been steady-as-she-goes dividend plays over the past decade.
Thinking of holding either for the near-term—particularly as a new holding? Think again.
Growth prospects for both are marginal, costs are in the stratosphere, and those dividend increases that so many of us counted on are under pressure, if not in outright jeopardy.
Let’s take a closer look…