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Telecom Evolving Into a Defensive Industry

Investments in telecom stocks are more defensive than most might think.

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In the midst of one of the worst market meltdowns in history, investors will inevitably shift their focus from companies pursuing aggressive growth strategies in higher-risk industries to those that operate in more defensive industries. Ironically, the telecommunications sector has moved from the former to the latter in the eight years since the market implosion following the tech bubble. Since the beginning of the decade, this sector has matured in more ways than one, shifting from an industry known for high leverage, weak profitability, and uncertain growth potential toward solid cash flows and steady dividends. Despite these changes, stocks across the industry, both in the United States and abroad, have been beaten down to levels not seen since the last bubble burst.

Telecom Maturing, But With Growth Prospects Intact
A big part of the maturation process within the telecom industry has been the proliferation of wireless devices and Internet usage within our society. Wireless phones and Internet access are now viewed as necessities rather than luxuries for a major portion of the population. More than 80% of the U.S. population has a wireless phone today--double the penetration in 2000--and nearly 75% of Americans use the Internet, up from 44% eight years back. The phenomenon is by no means unique to the United States, as wireless penetration rates (defined as SIM cards per person) in most of Europe are in the triple-digit range, and emerging-markets countries are closing in fast.

Imari Love does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.