What's going on?
Shares of “defensive” telecoms companies have been out of favor with investors lately – but on Tuesday, Vodafone and Iliad reminded them that a good defense can be the best offense.
What does this mean?
Vodafone, the world’s second-largest telecoms company, announced it’ll make a higher profit this year than it had previously thought. The company has been proactive recently, buying rival Liberty Global’s German and Eastern European cable television businesses – an acquisition that played a big part in its improved forecast. Investors who are becoming more positive about Germany’s prospects might now look twice at the telecoms giant.
Just next door, French carrier Iliad – which once took La République by storm with its low prices – has recently been losing customers to competitors, weighing on its earnings and share price. Iliad also announced a decisive move on Tuesday: it’ll buy 20% of its shares at 26% more than Monday’s share price, and increase its dividend almost threefold.
Why should I care?
For markets: Eating their own dog food.
Share buybacks tend to boost a company’s stock price for a couple of reasons. They indicate to investors that the firm’s management is confident in the company’s future prospects and believes its stock is undervalued. That, in turn, might ignite appetite for shares among new investors. And, of course, fresh demand for the stock should push its price higher – especially in Iliad’s case, where a specific, higher-than-current purchase price has been promised, benefiting existing stockholders.
The bigger picture: Defense isn’t always protected.
Telecoms companies lock their customers into long-term contracts, which makes their earnings relatively stable and predictable. It’s why they’re seen as “defensive”. And while recent growth has partly been thanks to bundling cell phone, internet, and television plans, costs from the 5G rollout are growing too. Without carefully balancing revenue and costs, telecoms firms risk meeting the fate of defensive consumer staples company Dean Foods, which filed for bankruptcy on Tuesday (tweet this).