Telecoms are offering income potential but through convertible paper rather than through shares. Som...
Telecoms are offering income potential but through convertible paper rather than through shares.
Some 18 months ago British Telecom shares offered a yield of 2.8% which was above the market average. Now the yield offered is only 1.5% compared with the yield on the FTSE 350 Index of 3.3%.
The sector takes up 15.5% of the FTSE 350 index making it impossible not to hold any telecom companies within a portfolio, according to Neil Cumming manager of Aberdeen High Income unit trust.
Cumming is overweight both BT and Cable & Wireless, preferring to hold well established incumbents rather than newer companies, such as Energis or Kingston Communications.
He says: "Both companies are more competitive beasts compared to smaller telecom companies. BT's market capitalisation is £96bn whereas Energis is one-tenth of the size. So in terms of research and development BT can benefit more from economies of scale."
As well as favouring pure equity plays Cumming holds TeleWest via a convertible bond which he bought at £91 per bond and which is now valued at £117, the coupon yield on the 2007 paper is 5.25%.
He says: "Usually it takes two to three years for the performance of the underlying equity to be reflected by the convertible, so the bond has shown good performance. In addition I expect further good performance with TeleWest linking up with Flextech."
Gartmore is overweight telecoms in its income portfolio in line with the group's strategy on the growth side.
Tim Gregory, manager of Gartmore UK Growth & Income unit trust, works on a total return basis and is not perturbed by the lack of income offered by telecoms citing the growth the stocks offer.
Over the 12 months to 4 January the FTSE 350 Telecoms index grew by 45%, in sterling terms. Another indication of the growth element in telecoms is that BT bought Cellnet for around £8bn and recently Warburgs valued the Cellnet business at £15bn. Even so, Gregory does believe income can be found from companies in the sector.
He says: "Our portfolio has exposure to Orange debt which offers a yield of 3.3%. In addition I hold an Orange convertible bond which has grown by 83% since I bought it at par."
In the coming few weeks Gregory believes there will be a buying opportunity in the market and he may increase his overweight position in telecom stocks further.
On 4 January British Telecom fell by 27p to 1,396p on the same day the FTSE 100 fell by 1.1%. The declines were sparked by falls in the US, the Dow Jones and the S&P 500 indices fell by 3.2% and 3.8% respectively in dollar terms, due to expectations of an interest rate rise in the US.
Gregory says: "During the short term the UK market may fall and instead of selling out of stocks we intend to capitalise and increase our holdings in a number of areas."
One reason why he is particularly bullish about the telecom sector is the start up of data being sent via mobile in addition to voice communication. Gregory believes this opens many new avenues for telecom companies with consumers being able to access the internet and send e-mails.
Johnson Fry is neutral telecom stocks and draws income from other sectors in the market. Chris White, manager of Johnson Fry UK Income fund, says: "Telecoms is a capital growth sector providing very little income. Since the sector is such a large part of the index we prefer to hold a neutral weighting. The portfolio's largest holding is Vodafone Airtouch and it also has exposure to British Telecom and Cable &Wireless."
Unlike Gregory and Cumming, White's exposure to telecoms is only through equity issues rather than debt and convertible bonds. He says: "Some 20% of the portfolio is in convertible bonds but there is better convertible paper in sectors other than telecoms."
Company results round-up
Tim Berners-Lee’s ‘Solid’ project
963 IFAs surveyed
Our weekly heads-up for advisers