Euro zone telecoms stocks are buzzing. After years of gloom, sentiment has dramatically revived, as regulators have swung from promoting competition and low prices at all costs to permitting a wave of consolidation. As the euro zone's big four incumbents outline future prospects and report annual results over the next fortnight, investors may find the market has run ahead of itself.
In two years, the combined market value of this quartet - Orange, Telecom Italia, Telefonica and Deutsche Telekom - has recovered from euro 112 billion to euro 190 billion. Former laggard Orange has turned star performer, returning 134 per cent including dividends in two years. For the French firm's German, Italian and Spanish counterparts the scorecard reads 108, 59 and 41 per cent, respectively.
In part, that rewards real change. At Orange, for example, dealmaking solved problems in Britain and Spain.
But a lot of good news already appears to be reflected in the share prices. Since 2010, the sector has largely laboured at a chunky discount to the wider Stoxx index in price-earnings terms. That has reversed since October 2013, and European telcos now trade on an average forward PE of 19.2 times, Datastream shows. That is 26 per cent above the market norm.
The rarefied multiples make the shares vulnerable to bad news. It is easy to see an upset if results miss expectations, outlooks are surprisingly gloomy, or new capital-spending targets seem over ambitious. Further out, the mergers and acquisitions could go awry if, say, antitrust watchdogs play hardball or hoped-for market repair fails to arrive.
That said, the telcos have a potent weapon. The share price rallies recognise an increasingly sought-after investment characteristic: dividend income. True, there were cuts in the not-too-distant past, and that is unnerving. But Morgan Stanley analysts reckon the sector's yield will come in around 4.5 per cent in 2016. In contrast, sovereign bond yields have all but evaporated, while other blue-chip standbys, like energy and utilities, are struggling to protect payouts.
In two years, the combined market value of this quartet - Orange, Telecom Italia, Telefonica and Deutsche Telekom - has recovered from euro 112 billion to euro 190 billion. Former laggard Orange has turned star performer, returning 134 per cent including dividends in two years. For the French firm's German, Italian and Spanish counterparts the scorecard reads 108, 59 and 41 per cent, respectively.
In part, that rewards real change. At Orange, for example, dealmaking solved problems in Britain and Spain.
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But a lot of good news already appears to be reflected in the share prices. Since 2010, the sector has largely laboured at a chunky discount to the wider Stoxx index in price-earnings terms. That has reversed since October 2013, and European telcos now trade on an average forward PE of 19.2 times, Datastream shows. That is 26 per cent above the market norm.
The rarefied multiples make the shares vulnerable to bad news. It is easy to see an upset if results miss expectations, outlooks are surprisingly gloomy, or new capital-spending targets seem over ambitious. Further out, the mergers and acquisitions could go awry if, say, antitrust watchdogs play hardball or hoped-for market repair fails to arrive.
That said, the telcos have a potent weapon. The share price rallies recognise an increasingly sought-after investment characteristic: dividend income. True, there were cuts in the not-too-distant past, and that is unnerving. But Morgan Stanley analysts reckon the sector's yield will come in around 4.5 per cent in 2016. In contrast, sovereign bond yields have all but evaporated, while other blue-chip standbys, like energy and utilities, are struggling to protect payouts.