And telecom stocks are paying for it.
Even though Americans are paying more for just about everything else, the average cost of mobile plans continues to fall. Much of this is due to intense competition between Verizon (VZ), CNN’s parent company AT&T (T) and T-Mobile (TMUS). Price wars are more common than ever, even after T-Mobile’s merger with Sprint in 2020, a deal some feared would lead to more pricing for the industry giants.
The decline in wireless bills “is in stark contrast to the prevailing inflation that seems to be happening everywhere,” analysts at Wall Street research firm MoffettNathanson wrote in a report titled “Inflation in Industry Forgotten.”
And this is reflected in the financial results. AT&T, Verizon and T-Mobile reported fourth-quarter average revenue per user (ARPU) declines, a key price metric in the wireless business. AT&T posted the biggest decline of 1.1%, while Verizon and T-Mobile prices fell less than 1%.
Analysts say this could be a key reason Verizon and AT&T stocks have not taken off this year. Verizon has not changed, and AT&T has lost 6%. While not as bad as losing the S&P 500 nearly 7.5%, there is still nothing to call (or write) home about.
“Against a backdrop of horrendous geopolitical risks and worrisome financial risks, it’s no surprise that telecom stocks outperformed,” analysts at MoffettNathanson wrote in a note. “If there’s a surprise, it’s that they haven’t surpassed more.”
They note that the top wireless providers in the US are not connected to Europe, where the risk of a recession is higher and consumers are feeling an even greater crisis due to skyrocketing oil and natural gas prices.
Wireless shares should still rise even if the economy slows down
Generally, telcos are also considered good defensive bets when the economy slows down.
“In the event of a recession in the US, their services are, by and large, indispensable. Verizon and AT&T are consistently paying dividends,” the analysts added. Both companies pay out dividends at a yield significantly higher than long-term Treasury bonds.
“They seem to be perfect for their time. What they lack, however, is price power,” the analysts added.
T-Mobile’s stock is holding up better, up about 10% this year, thanks in part to rising market share and low churn rates (i.e., subscribers switching wireless carriers).
“It looks like only T-Mobile has the potential to weather this storm,” analysts at MoffettNathanson said. “Given that there is still a lot of room for growth ahead…we believe T-Mobile share growth will accelerate.”
As part of the deal with Sprint, T-Mobile said it would not raise prices for existing customers for three years. But AT&T and Verizon seem to understand that they may have to raise prices.
At a meeting of AT&T analysts earlier this month, Chief Financial Officer Pascal Desroches predicted there would be a “more normalized industry background” later this year and what he called “surgical” price increases. The goal is “stable ARPU,” he added.
And Verizon’s chief financial officer Matt Ellis said during the company’s earnings call in late January that there is “good news” for the company in terms of spending.
Many of the company’s expenses are tied to long-term contracts, he said, meaning Verizon “will not necessarily feel the full impact of inflation at the same pace as other industries.”
But Ellis did not lose sight of the threat of further price pressure.
“Inflation exists. And, of course, we will see it,” he said. “It’s real. We will take action to address this issue.”