Why U.S. Wireless Stocks Have Had A Solid Year So Far

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The stocks of major U.S. wireless carriers have had a solid year so far. While AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) are up by about 18% year-to-date, Verizon (NYSE:VZ) has seen its stock price rise by roughly 13%. Sprint (NYSE:S) – the smallest of the four players – is up by a whopping 75%. The S&P 500, in comparison, is up by just about 5.5%. Below, we take a look at some of the reasons for their strong performance this year.

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Flight To Safety, Strong Dividend Yields

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There has been significant global macroeconomic uncertainty this year, with the slowdown in the Chinese economy and the U.K’s decision to exit the European Union. This is likely to have led to a flight to safer, U.S. dollar denominated assets. Large cap U.S. wireless stocks could have benefited from this trend, as they are viewed as defensive bets, given their low betas, stable cash flows and limited overseas exposure. Additionally, the U.S. Federal Reserve has been relatively slow to raise interest rates, making the dividends of large cap telecom stocks attractive to yield-seeking investors. For example, the trailing twelve month dividend yields for AT&T and Verizon stand at 4.6% and 4.3%, respectively.

Getting Customers To Pay More For Wireless Services

Three of the major carriers have effectively increased prices over the last few months. While AT&T and Verizon moved to shore up their ARPUs by offering plans with higher data caps at slightly higher price points, T-Mobile indicated that it would do away with its Simple Choice tiered plans in favor of an unlimited plan (albeit with significant fine print) that is priced slightly higher than its most popular current offering (related: T-Mobile’s New Unlimited Plan Could Be Good For Its Bottom Line). While Sprint continues to offer deals such as 50% off to porting customers, CEO Marcelo Claure has indicated that the carrier could raise pricing in the not so distant future. This should bode well for carrier margins, which have already been expanding over the last two years.

Postpaid Subscriber Adds

While the wireless market is slowing down amid increasing penetration, companies are focusing on the most valuable postpaid smartphone users. During H1, the big four players together added a net of 1.25 million postpaid phone subscribers. Sprint added 195k postpaid phone subscribers, while T-Mobile scored about 1.52 million net subscribers. However, AT&T lost a total of about 543k postpaid phone customers, as it shifted focus away from lower-value feature phone subscribers.

Seeking New Avenues For Growth

The big two wireless carriers have been diversifying into areas such as content and digital advertising. For instance, AT&T acquired DirecTV, the largest U.S. satellite TV provider, in 2015, making it a key player in the content distribution space, across various platforms including mobile, broadband and television. The markets reacted positively to the deal, and AT&T has been executing well in terms of realizing cost and revenue synergies. Verizon, on the other hand, is doubling down on the digital advertising space, spending close to $10 billion to acquire AOL and Yahoo’s web assets. While there are significant risks, there could be a sizable upside to be gained, given the rapid growth in the mobile ad market. (related: Verizon Buying Yahoo: Analyzing The Benefits And Challenges)

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