Global Telecoms: Attractive Dividends as Capex Eases
Global telcos met market expectations, providing much-needed relief after years of disappointment. In the US and Asia Pacific (APAC), telcos’ 1Q24 earnings were broadly inline with street expec...
Chief Investment Office - Hong Kong24 Jul 2024
  • Telcos in the US and APAC reported 1Q24 earnings that were broadly in line with consensus after years of earnings pressure due to high 5G capex
  • Mobile tariff hikes were observed globally, particularly in the US, Australia, and India, while China maintained stable pricing
  • 5G capex peaked in DMs; US telcos capex on the decline since FY2022
  • Peaking capex and higher mobile tariff translating to higher free cash flow
  • Telcos are expected to see low to mid-single digit growth in their core telecom business
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Global telcos met market expectations, providing much-needed relief after years of disappointment. In the US and Asia Pacific (APAC), telcos’ 1Q24 earnings were broadly inline with street expectations, marking a positive shift following years of earnings pressure due to high 5G capex that raised depreciation expenses without boosting revenue. Notably, Singapore telcos have issued the most bullish guidance, projecting double-digit growth in core operating profit.

Global mobile tariff hikes and declining 5G capex in DMs translating to higher free cash flow. In 2024, telcos in APAC (especially India and Australia), have raised mobile tariffs, driving improvement in average revenue per user (ARPU). Between January and June 2024, all major US telcos raised prices, particularly on their legacy plans, citing rising costs and encouraging users to switch to newer plans with higher data allowance. While Chinese telcos have not implemented any notable price increase during this period, we can still expect revenue growth to be driven by 5G ARPU, which commands a 5-10% premium over 4G ARPU.

Furthermore, 5G capex (including spectrum cost) has already peaked in developed markets (DM). US telcos capex has been on a decline since FY2022, following the deployment of mid-band spectrums deployment (3GHz - 4GHz) that optimise speed and coverage. Similarly, overall capex in China also peaked in 2022, due a decline in 5G investment. Chinese telcos have achieved a 79% 5G subscriber penetration rate in 2023 (vs 65% in 2022) and surpassed the rest of the world. This is largely due to their high capex intensity between 2019 and 2022. APAC telcos in Australia and Singapore also saw their capex peak in 2022, after achieving high-population coverage and utilising efficient mid-band spectrum.     

Favour mobile-market leaders with attractive dividend yields and additional growth drivers from adjacent opportunities. Most telcos are expected to see low to mid-single digit growth in their core telecom business. US telcos are more conservative than others in pursuing non-telecom adjacent opportunities which is also reflected in their lower P/E multiples. In contrast, Singapore telcos are expanding into data centre and information and communication technology (ICT) businesses in the region. Chinese telcos are also capitalising on the digital transformation of enterprises, gaining market share from non-telco public cloud service providers, and boosting their own cloud businesses. With regard to dividends, Singapore telcos have committed to 75-80% payout ratio compared to 70-75% for Chinese telcos and 55%-60% for US telcos.

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