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Should Investors Consider Telecommunication Stocks Now?

In a rapidly changing business environment, telecommunications is one of the most durable businesses in Singapore. Today, I’ll be looking at the insides of this business.

In Singapore’s telecommunications market, there are really only three players. They are, in order of size, Singapore Telecommunications Limited (SGX: Z74), StarHub Ltd (SGX: CC3), and M1 Ltd (SGX: B2F).

The nature of the telecommunication business

On the surface, it might seem that telecommunications is a hard-to-understand business, given all the technological terminologies used in the industry. In fact, it can also be difficult to understand the technologies in detail.

But, it is actually not that difficult to understand it from a business standpoint. To make it brief, telecommunication companies (even ones with different technologies) do two things:

  1. First, invest a large amount of capital to build infrastructure – that would be things like cellular towers, cables, various types of systems, and more.
  2. Next, provide communication services such as voice (you use this to talk on the phone), data (browsing the internet or using apps), and to some extent videos. These services are offered on either a subscription basis or a pay-as-you-go basis.

So in a way, the telecommunications business is like investing in a property: There is huge initial capital outlay and then future recurring rental income. But, what’s great about the telecommunications business? Personally, I believe there are two strong suites:

  1. Telecommunication companies are providing a needed product: Communication services. There could also be potential for growth given the rise in data usage amongst consumers.
  2. The industry appears to have a high barrier to entry due to capital, regulatory, and scale restrictions. In Singapore, there are only three players at the moment.

Valuation of telecommunication companies

There are many ways to look at the valuation of a telecommunication business. There are metrics such as the dividend yield, price to earnings ratio, price to cash flow ratio, or EV-to-EBITDA multiple (Enterprise Value to Earnings before interest, taxes, depreciation, and amortisation). The last metric is widely-used to value telecommunication companies.

In here, I would like to keep it simple and focus on dividend yields, since all three of Singapore’s telecommunication companies have consistent dividend track records over the past decade as you can see in the chart below:

Ordinary dividends per share for SingTel, StarHub, and M1
Source: S&P Global Market Intelligence

Here’s how the dividend yields of SingTel, StarHub, and M1 look like at the moment:

SingTel, StarHub, M1 dividend yield table
Source: S&P Global Market Intelligence

The above yields are not the highest in Singapore’s stock market, but are healthy.

One major risk to consider

Despite telecommunication stocks in Singapore having a compelling business model and healthy yields, there is a significant risk that investors should keep in mind: The possible entrance of a fourth player into the scene. That would bring more competition to the industry and possibly weaken the business of the incumbents.

Foolish Takeaway

To sum up what I’ve shared, (1) the telecommunications business is highly sustainable, though the possible entrance of a new player may change the landscape a few years down the road, and (2) telecommunication stocks in Singapore have decent dividend yields.

There’s one last thing to note. While what you’ve seen above may be useful, they should be taken only as a starting point for further research and not as the final word on the investing merits of the three telecommunication stocks in Singapore.

Meanwhile, if you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.