BofA sees telecom stocks as defensive dividend stocks in the face of inflation
In an inflationary environment, stocks that offer some protection against inflation become interesting.
Analyst David Wright of the US investment bank Bank of America (BofA) therefore advises in an industry study published on Wednesday on European telecom stocks, although careful selection is important. In this context, he has upgraded the shares of the mobile communications company Telefonica Deutschland by two notches from “Underperform” to “Buy” and raised the price target from EUR 2.30 to EUR 2.90.
In addition, he estimates slightly higher price targets for the O2 parent Telefonica, Deutsche Telekom, Vodafone and their radio mast subsidiary Vantage Towers, while they are now slightly lower for 1 & 1 or BT Group. The valuation basis is a little further in the future and now relates to December 2022 and for UK companies to March 2023.
On the way to the year 2022 it can be observed that the interest of private donors in the telecommunications sector has increased, while the European telecommunications sector is historically underweighted on the stock exchanges, writes the BofA analyst. “With general market sentiment shifting towards defensive stocks, we see some catching up. However, investors should be careful to avoid ‘value traps’ as inflationary pressures weigh on returns.”
Wright therefore advises looking out for possible price drivers for individual stocks, but also paying attention to the pricing power and austerity measures of companies, as these could counteract inflationary pressures. The investors with whom he is in contact are aware of the historical pressure on earnings that is created, among other things, by the capital intensity – for example when building radio towers or expanding fiber optics. If rising inflation was added to the costs, it would be difficult.
In detail, the expert refers to the “rapidly” developing area of cell phone masts, in which a continuous consolidation in the form of mergers is to be expected. The fiber optic expansion is also shifting to partnerships, and the outsourcing of data centers in Europe would be desirable. Although it is not yet very well developed, it is still valuable, especially in combination with cloud and other services in the area of information and communication technology.
The individual markets also differ from each other when it comes to price increases, for example. According to Wright, there is more scope for fee increases in Germany and the UK than in Italy and Spain. Against this background, he sees the shares of Deutsche Telekom, the BT Group and Vodafone as well as those of Telefonica Deutschland as his favorites.
Regarding Deutsche Telekom, which he rates “Buy” and a target price of EUR 24.80, he emphasizes that the Bonn-based company has ambitions to sell their cell phone masts in the current year, which could release considerable values. “In addition, Germany is one of the more stable markets in Europe when it comes to price increases.”
Vodafone, classified with “Buy” and a new target price of 186 pence, could also benefit from a further monetization of its radio mast subsidiary Vantage Towers (new, higher target price 35 euros). At the same time, the company’s business in its home market of Great Britain and in Germany are more inflation-proof, the cost-cutting measures are well advanced and wages are relatively low, writes the BofA analyst.
Telefonica Deutschland, now recommended for purchase by Wright, is “in an attractive German market” and is gaining momentum with increasing network parity. In addition, O2 is the least risky in terms of wage and energy costs in the sector comparison.
According to the “Buy” rating, Bank of America assumes that the stock will generate a total return from capital gains and dividends of at least 10 percent within 12 months.
/ ck / mf / bek / jha /
Analyzing Institute Bank of America.
Publication of the original study: 01/12/2022 / 01:42 / EST
First distribution of the original study: 01/12/2022 / 01:42 / EST
NEW YORK (dpa-AFX)
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