Telecommunications is one of the fastest growing and diverse sectors of both industrialised and developing economies. For stock market investors the spate of privatisations over the past decade combined with the flotation of newly formed companies supplying cellular telephony and related services means that there is now a wide array of quoted telecoms companies.
The sector consists of two major groups of companies. On the one hand there are the original state companies such as British Telecom in the UK and Deutsche Telecom in Germany. On the other hand, there are the aggressive new entrants to the market such as Esat in Ireland and companies such as Vodafone and Orange in Britain.
With monetary union now a racing certainty combined with an ongoing process of liberalisation, investing in a number of Europe's telecoms companies should provide investors with attractive long-term returns. For Irishbased investors the recent halving of the capital gains tax rate to 20 per cent means that direct investment in a number of these shares is now tax efficient.
The privatised telecom companies are all very large companies with huge subscriber bases. For example, British Telecom's line base amounts to 27.5 million and the company has annual sales of £15.5 billion.
However, these companies operate in regulated environments and are faced with increasing competition from new entrants. They are all expanding their activities in the growing cellular services and Internet related services segments of their respective markets. This involves major capital expenditure programmes. The table shows the main quoted stocks in Europe.
Given the strong market background of recent years and the hype surrounding new privatisations the share prices of many of these companies have risen sharply. However, the price-earnings ratios range between 13.5 for BT to around 18 for Telefonica and Cable & Wireless which compares favourably with other sectors of the market.
The higher ratings for Cable & Wireless and Telefonica reflect that they have significant interests in the more rapidly growing regions of Hong Kong/China and Latin America respectively. Given their scale of operations all of the above companies offer investors the opportunity of investing in the rapidly growing telecoms industry with a moderate degree of risk. The market in all of these shares is extremely liquid and information on the companies is widely available.
Although telecommunications is likely to be a major growth sector for many years all of these companies are faced with a range of regulatory and competitive pressures. Most have had to engage in restructuring and costcutting exercises to remain competitive. Furthermore, all companies are having to engage in major investment programmes to keep up with technological change and to enable them to compete with new entrants. For investors a major attraction of these companies compared with new entrants is that the cashflow from their traditional business provides them with a firm base.
My three favoured stocks from the above list are Cable & Wireless, Telefonica and Deutsche Telecom. A portfolio holding these companies will have exposure to both Europe and the faster growing markets of Hong Kong/China and Latin America. Investment in these companies will also provide exposure to cellular telephony and related services.
