Telecommunications companies were considered a defensive stock in a recession, but now they’re losing their Spark with investors.
The country’s most dominant telecommunications provider, Spark, will likely need to cut its dividend as it fights to keep costs under control in an industry undergoing structural change, according to a leading analyst.
“It hasn’t generated a lot of revenue growth the last decade,” Jarden head of research Arie Dekkertold Markets with Madison.
“So it’s not a revenue growth story. Management of the operating cost base is very important to maintaining earnings.”
Spark’s share price had declined almost 40% year to date to around $3 - a market capitalisation of $5.6 billion.
That followed a 72% decline in its annual net profit and a 14% decline in revenue (on an adjusted basis, profitability fell 21% and revenue declined 1.2%).
Dekker’s research suggested Spark’s dividend had been overpaid for the past decade compared to its earnings, with recent payouts to investors supported by financial transactions such as selling its cell tower sites for just shy of $1 billion.
“The clear point is that the earnings haven’t grown into the dividend that Spark’s had.
“I think it’s probably time to reset the dividend back to where the earnings sit and then increase it with actual demonstrated growth in the earnings and cash flow.”
Demand for mobile data had benefited telecommunications companies like Spark, but voice services were retreating, analyst Arie Dekker said. Photo / NZ Herald
Forsyth Barr analyst Aaron Ibbotson agreed, with his research stating: “We expect continued weak performance from here.”
“Spark’s historically dominant position within private cloud in general, and government cloud in particular, is also deteriorating, driven by a combination of structural, technical and competitive factors.” Ibbotson wrote in September.
Outside of the cloud business, Dekker said competition among the three telco players - Spark, One NZ (owned by Infratil) and 2degrees - had not changed meaningfully over the past decade, and he did not expect it to in the future.
“The rate of change and share, and those sorts of things [in this industry] is very slow.
“So in any sort of set period, we wouldn’t expect there to be major changes in the dynamics in influencing their share.”
However, Spark did have an opportunity ahead of it – data centres.
Watch Arie Dekker discuss the dynamics of the telecommunications market in today’s episode of Markets with Madison above.
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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.
Madison Reidy is the host and executive producer of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.
