Reasons Telecom Stocks Are Doing Better Than S&P 500 As Recession Nears


The three major cellphone service providers — Verizon Communications (NASDAQ:VZ), AT&T (NASDAQ:T), and T-Mobile US (NASDAQ:TMUS) — appear to investors to be more appealing than many growth equities these days. With a possible recession in the United States impending, VZ stock, T stock, and TMUS stock may continue to do better than the S&P 500. At least, that’s how some Wall Street analysts are spinning it.

Morgan Stanley Simon Flannery analyst, in a report, stated, “Disappointing overall corporate earnings growth and rising recession fears could help support a continued rotation into the telco sector as something of a haven.” T-Mobile stock is up 16 percent in 2022, while AT&T stock is up 10 percent. Verizon’s shares have dropped roughly by 3%. Meanwhile, the S&P 500 has fallen by more than 20%.

Both VZ stock and T stock give substantial dividends. Analysts anticipate that TMUS stock buybacks will begin in late 2022 or early 2023. According to UBS analyst John Hodulik, While rising interest rates are a concern for IT stocks since they diminish free cash flow, telecom stocks can count on “mostly contractually based revenue streams and more recession-resistant, end-user demand.” But revenue growth is not a reason to buy telecom stocks.

Analysts polled by FactSet estimate that 2022 revenue for T-Mobile will climb 1.5%, while Verizon’s sales will increase by 2.4 percent. AT&T’s revenue will fall in 2022 as a result of the WarnerMedia separation. Analysts predict that revenue will shrink by approximately 5% in fiscal 2023.

Nonetheless, 5G networks may benefit all three wireless service providers in the long run. Telecom providers hope to upgrade people to unlimited data plans using 5G marketing. Furthermore, new revenue streams from private 5G services to commercial customers may arise. In the meantime, Verizon and T-Mobile are expanding 5G broadband services to households. Analysts believe 5G home broadband client additions could be a bright spot in the second-quarter earnings report.

Also, AT&T and Verizon raised some prices in the June quarter, citing inflationary concerns. Analysts believe the price increases will bring a short-term revenue boost. Cowen analyst Gregory Williams wrote in a report that despite challenging wireless industry fundamentals, all three carriers hiked prices/fees in the last month as cellular service has become a utility-like requirement, with criticality higher than ever, making wireless a less desirable business as investors contemplate the weakening of the consumer.”

On July 21, AT&T will reveal its second-quarter earnings. Verizon will follow immediately on July 22. At Wells Fargo, analyst Eric Luebchow says current market conditions favor telecom stocks. “We don’t think the sky is falling on the wireless carriers — there are some definite challenges ahead, but the Big 3 should be far more durable and resilient during these economic times than many other more cyclical names,” he said in a report.

On the other hand, the top three wireless service providers are facing new competitors. Dish Network (DISH) is constructing a 5G wireless network from the ground up. Furthermore, cable TV providers like Comcast (CMCSA) continue combining wireless services with their broadband offerings. Because of the free cash flow they create, AT&T and Verizon pay out significant dividends. However, as a result of the WarnerMedia split, AT&T reduced its dividend by 46 percent to $1.11 per share.

AT&T ranks #1 out of eight stocks in IBD’s Telecom Services-Integrated industry group. The IBD Composite Rating for T stock is 79 out of 99. VZ stock comes in second place with a CR of 73. While wireless service providers have outperformed the S&P 500, cell tower operators have not. American Tower (AMT) shares have fallen 11% in 2022, while Crown Castle (CCI) is down 17%. SBA Communications (SBAC) has down 16%.

Wireless phone providers rent tower space to store radio antennas. Phone companies typically sign 15 to 20-year agreements with tower providers. The majority of towers house radio antennae from various carriers. Some analysts believe that 5G network buildouts will benefit tower companies. In cities, 5G networks are linked to fiber-optic communications infrastructure.

Brandon Nispel, KeyBanc Capital Markets analyst, said, “Our view is that 2023 should still be a stronger leasing year vs. 2022, though 2023 could represent the peak gross leasing year,” Carriers are competing on network quality, which suggests leasing is likely to remain higher for longer as carriers compete throughout the duration of the 5G cycle.”

Featured Image: Megapixl @F11photo

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About the author: Adewumi is an expert financial writer and crypto enthusiast with more than 2 years' experience in writing crypto news and investment analysis. When not writing or reading about crypto and finance, Adewumi spends his time watching football and visiting museums and art galleries.