Verizon (VZ) has just increased its dividend and now offers a yield of 6.5%. There is nothing remarkable about this, all across the world world mobile operators offer fat yields, resilient business models and low valuations. Furthermore, mobile stocks are beginning to outperform other high yielding stocks, such as utilities. In Japan, NTT DoCoMo (DCM) is up around 20% in dollar terms, making it on of the best performing mega caps in the world.
DoCoMo highlights another interesting point about mobile stocks, which is that besides the yield, mobile operators are beginning to grow thanks to an explosion in data revenues. This time next year more than half of DoCoMo’s subscriber revenue is likely to come from data rather than voice.
Data is the future for mobile operators. According to Cisco (CSCO), the volume of traffic passing over the internet will increase by just over four times by 2014. By contrast, mobile data revenues are expected to increase by more than 30 times. Today, mobile data represents less than one per cent of internet traffic, by 2014 it will be around 6%. It will continue to explode as a billion new subscribers are expected to join mobile networks in the emerging markets.
Below is a summary of some recent results
- Wireless data grew 27% to $4.4 bn year-over-year.
- Post paid data ARPU was up 18%
- ARPU on smartphones continued to be 1.7 times that of other devices.
- iPad 3G subscriptions - 75% took the highest tariff.
- Year-on-year free cashflow up 75%
- At the end of 2 nd Qtr -35% of retail post-paid had a smartphone. It was 20% at year-end.
- 20% of total postpaid (including business) had a smartphone.
- 40% of device sales through direct channels were smartphones.
- Consumer ARPU up 11.4% year-on-year.
- For the first time in 6 quarters, the Group saw positive organic service revenue growth - at 0.9%.
- The majority of increase was driven by emerging markets, such as India and Africa.
- Non SMS revenues ( data) YoY growth of 25%.
- Revenue for the 4 largest European markets were declining at -3.6% YoY. In this QTR the rate of decline slowed to .2.9% YoY. The 70 bps of improvement was driven by a 110 bps increase from non SMS data.
- Smartphone ARPU is around £4 - £6 a month.
- 51% of smartphones sold take a separate data package.
AT&T (T) added 900,000 new connected devices, such as e-readers and alarm monitoring, during the quarter. While these devices have a lower ARPU than a phone they bring higher margins. The red line on this chart illustrates earnings forecasts for AT&T, compared to the performance of the shares. Forecasts have just been edged up after a period of stability.
I believes that next year there could be an acceleration in the rate of increase of mobile data with the introduction of high speed LTE networks, and the continued spread of smartphones and iPads. In the last week, market analyst IDC increased its forecasts for smartphone growth this year from 44% to 55%. By 2012, I believe that we could see half a billion smartphones on sale. On average, a smartphone generates ten times more data traffic than a conventional phone. A device like an iPad will generate considerably more.
LTE networks offer a dramatic increase in data rates, some claims put download speeds as high as 100 Mb, which rivals that of many office networks. Nokia/Siemens estimate that there will be more than 20 LTE networks in operation by the end of this year. Another plus for operators is taht the cost of carrying data on LTE is several times cheaper than on 3G, so operators will often see margins increase.
Verizon says that it has no immediate plans to follow AT&T by offering different pricing plans for mobile data usage. However, we would expect this to change once LTE is up and running. The initial evidence from AT&T is that the new pricing plans are popular.
The trend is plain to see, as Jim Tailcleu, the chairman of American Tower (AMT), spelled it out in the companyʼs most recent results:
“Fortunately, for both the wireless carriers and the tower industry, consumers are willing to pay for the enhanced services. As a result, wireless data is now the primary growth engine for US carrier revenues.”
Disclosure: No positions held