This column might be unpopular. But if you are honest with yourself, you know that the truth often hurts.
Check a couple of big European service provider stocks on Yahoo Finance or your preferred financial web site. Look at the last 2 years, 5 and 7 years – take 7 years rather than 10 to hide the 2000-2002 dot.com crash, which was truly exceptional. What do you see?
We have done the check for you, for the following European service providers: BT, Deutsche Telekom, France Telecom (Orange), Telecom Italia, Telefonica, Vodafone. And added the Euro Stoxx 600 index on top as benchmark.
Over the last 2 years, this is what happened:
- Down a lot: France Telecom
- Down a bit: Deutsche Telekom, Telecom Italia
- Up a bit: Telefonica
- Up a lot: Vodafone, BT, Euro Stoxx 600 index
And the results are, over 5 years:
- Down a lot: BT, Deutsche Telekom, Telecom Italia
- Down a bit: France Telecom, Euro Stoxx 600 index
- Up a bit: Vodafone
- Up a lot: Telefonica
Over 7 years, you get the following picture:
- Down a lot: Deutsche Telekom, France Telecom, Telecom Italia
- Down a bit: BT, Vodafone
- Up a bit: Euro Stoxx 600 index
- Up a lot: Telefonica
Conclusion: owning any of the big telecom service provider stocks in Europe between early 2004 and early 2011, apart from Telefonica (which behaves more than its Latin American holdings), has not been particularly rewarding. In the best case, the stocks were flat or slightly down. In the most common case, the stocks were down 25%-60%. Disappointing indeed.
So time to sell? Don’t be fooled by the rear mirror view. Look at P/E instead, or better the E/P i.e. earnings yield, and compare them with long-term bond yields. What do you see this time? Earnings yield for telecom stocks are above 10%, whereas bond yields are about 5%. Great news: Telecom stocks are dead cheap!
So what does that mean? European Telecom Service Provider stocks, after a brief life as growth stocks in the late and crazy 90s, have behaved very much like value stocks since the end of the crash (not the financial crash, the dot.com crash). France Telecom and Deutsche Telekom have dividend yields of 7%-10%. Vodafone and Telecom Italia have been less generous in terms of dividend distributions, but also have earning yields around 10%. BT has been more irregular, but dividend yield was also 11% in 2008.
There is a saying on the stock market that the winners in the last economic cycle won’t be the winners in the current one. If you believe that, and if you also believe that we still have a long bull ahead of us, selling our European telecom stocks might not be a bad idea. They have underperformed their respective index in the last 7 years, and it is unclear why they would overperform now.
On the other hand, if you like bonds, then holding telecom stocks is not a bad idea. At the current valuations, they give you an excellent return and are largely protected against major downsides (something that you can not certainly tell from long-term treasury bonds).
All in all: whether you should buy or sell telecom stocks does not depend on the past but depends on what you believe is going to happen in the future that is not reflected in the current market prices. If your believes are essentially the same as those of the consensus market view: then forget it, you do not know something that others don’t. You should not buy individual stocks, buy the European index instead.
In the short term, the stock market moves up and down when unexpected things happen and take everybody by surprise. In the long-term, stock prices go up because demand for stocks is growing faster than supply.
Most European Telecom Service provider still need a good growth story. The consensus view currently is that none of them is going to pull one out of its hat any time soon. It can take a lot of time for a value company to re-invent its DNA – see how Apple Computers struggled during most of the 1990s, and how Nokia is struggling today.
But what if everybody is wrong? Can France Telecom, Vodafone and the likes still surprise us? Read our future column on how service providers might re-invent their NDA.