WBD - Wireless Services: Defensive Outperformance

2023-03-20 18:22:18 ET

Summary

• Many wireless providers have durable demand and dependable revenue, with high dividends and sustainable payout ratios.
• Over the last year, the Wireless Sub-Sector beat all three major indexes and the traditionally defensive sectors Utilities and Consumer Staples.
• Nine wireless providers were evaluated using a quality matrix with factors including Price/Sales, Net Income Margin, Free Cash Flow Margin, Debt to Equity, Forward Yield, and Payout Ratio.
• Based on this analysis, investors seeking defensive exposure might first consider VDMCY, VOD, or TEF.

Background

I'm sure most of us have a cell phone within arm's reach right now. Further, regardless of continued inflation or banking drama, we will keep paying our monthly cell phone bills. As an analyst, I call that durable demand and dependable revenue for wireless service providers. For bonus points, some wireless providers also pay high dividends with sustainable payout ratios.

Six months ago, I reviewed the sub-sector in an analysis entitled Wireless Services: High Yield With Defensive History . I identified six high-yield wireless services providers (Orange S.A. ( ORAN ), AT&T ( T ), Telefonica, S.A. ( TEF ), BCE Inc. ( BCE ), Verizon ( VZ ), and Vodafone Group Plc ( VOD )) and ranked them for quality based on yield, dividend safety, dividend growth, value, revenue, and debt. At that time, Orange S.A. was the top pick, and it substantially outperformed its peers and the S&P 500 over the last six months.

ORAN and S&P 500: Six-Month Total Return

Over six months, ORAN total return was 15.96% vs t 1.32% total return of S&P 500. As a sub-sector, wireless providers also outperformed S&P 500.

Defensive Outperformance: A Wider View

Wireless Sub-Sector: 1yr Performance

Over the last year, the Wireless Sub-Sector beat all three major indexes and the traditionally defensive Utilities and Consumer Staples sectors. Simply put, wireless providers were more defensive than companies tasked with keeping the lights on or selling groceries. The numbers speak even louder: wireless outperformed Consumer Staples by 17.2% over the last year.

Wireless Providers: Quality Rating

In addition to those wireless providers previously discussed, Vodacom ( VDMCY ), Tele2 AB ( TLTZF ), and Telephone and Data Systems ( TDS ) were added to this analysis. These providers were evaluated using a quality matrix with factors including Price/Sales, Net Income Margin, Free Cash Flow Margin, Debt to Equity, Forward Yield, and Payout Ratio. The values for each provider's factors were normalized by means of statistical percent ranking with relation to the group. The quality matrix was calculated as the sum of the percent ranks of the factors.

Wireless Providers: Quality Matrix Chart

The above chart is sorted in descending order of the best quality (highest matrix score) to the poorest quality (lowest matrix score).

Wireless Providers: Quality Matrix Plot

The quality matrix is presented graphically in the stacked bar chart to the left, with cumulative inputs for each factor. Based on this analysis, the top providers are VDMCY, VOD, and TEF.

AT&T ranks last but, it should be noted that the company completed the Warner Bros. Discovery ( WBD ) transition in the last year and reduced its dividend in the process. I would be foolish to claim that this relatively simple evaluation adequately addresses AT&T's complexities.

Screening and Quality Matrix Limitations

Investors should consider the quality matrix a screen only. The matrix factors, normalization method, and weights could all be adjusted and yield different results. Further, the matrix is based on the most readily available and common metrics. These metrics can change rapidly with share price or as new company reports are released. It does not include company-specific data available in quarterly reports and presentations. Every investment decision regarding an individual equity should be based on comprehensive analysis of that equity.

Conclusions and Recommendations

Over the last year, the Wireless Sub-Sector beat all three major indexes and the traditionally defensive sectors Utilities and Consumer Staples. I expect wireless providers to continue to perform defensively given durable demand for their services, dependable revenue, and high dividends with sustainable payout ratios.

Given current market conditions and an uncertain outlook, I believe most portfolios should include some defensive exposure to wireless services. Based on this analysis, investors might first consider VDMCY, VOD, and TEF.

Finally, a word of caution, high dividend stocks can be risky if dividends are not supported by revenue. Investors who are considering a high dividend stock are advised to scrutinize its payout ratio. If the payout ratio is consistently high over time, the dividend is unsupported by earnings and is at high risk of a cut with a resulting decline in price. I warned investors of exactly that situation in a previous analysis entitled Newtek Business Services: A Risky High Dividend .

If you do not reconcile your behavior with the goal of nature, but instead use some other criterion in matters of choice and avoidance, then there will be a conflict between theory and practice. - Epicurus, The Principal Doctrines

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