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April 30, 2024
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Setting aside whether they're UNDER-valued, the real question is why do companies/industries trade at multiple X of metric Y (dividend yield is a multiple at the end of the day). The two main things, in my eyes, are growth expectations and degree of certainty (setting aside things like WACC/risk free rates). You say that the sector is trading below historical forward P/E multiples, but that alone doesn't tell you much. What if historically, forward EPS showed 5% growth and now analysts think they'll be declining? Dividend yields are an even clearer example-my trailing dividend yield doesn't mean much to me if the company generates less FCF and has to cut its dividend.
In the case of telecom specifically, the short answer is that people expect long-term, secular pressure on legacy voice-based carriers (RLECs/CLECs/ILECs/etc) and require a higher dividend yield (or lower EBITDA/EPS multiple) to compensate for the fact that in 5 years your dividend (or EBITDA or EPS) will probably be lower. This isn't "new", but people have become more focused on it due to a few things that may increase competition/accelerate legacy voice declines-for example consolidation in cable and changes in how people consume video.
This is also a good example of looking through an index to the members within it. For example within the S&P 500 telecom index you have 5 companies: VZ, T, CTL, FTR, and LVLT.
You can divide these into 3 groups: VZ and T are incumbents copper-based wireline operators with leading wireless franchises that offset the declining revenue from their fixed (landline) business. Both are expected to grow topline next year, and both trade at high-single digits of trailing EBITDA.
FTR and CTL are smaller copper-based LECs. FTR's tricky because of all their M&A but both are expected to see organic revenue declines and both trade ~5-7x PF trailing EBITDA.
LVLT is a fiber-based backhaul provider that grows like crazy and trades at 15x trailing EBITDA.
you a TMT or telecom guy aren't you.
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