You can see why telecom companies love to snap up their rivals: Bigger companies make better stocks.
At least, that has been the case among key players in Canada and the United States in recent years, which has coincided with a very interesting time for the telecommunications sector.
Not only have companies had to navigate a terrible recession and financial crisis, they have also had to deal with tremendous changes in how we communicate. Land-line phones are being unplugged and cable TV is being threatened by streaming videos.
Five years ago, Apple Inc. had just introduced its first iPhone and Netflix Inc. was still several months away from introducing an unlimited streaming service for online movie and TV show viewing.
Through these changes, big telecom companies have served investors remarkably well. BCE Inc., Telus Corp. and Rogers Communications Inc. – which have market capitalizations ranging from $20-billion to more than $34-billion – have returned an average of 85 per cent over the past five years, after factoring in dividends.
That’s more than double the average return for smaller players such as Cogeco Cable Inc., Astral Media Inc. and Shaw Communications Inc., whose market caps are a fraction the size of the behemoths.
In the United States, big players have similarly dominated the smaller ones in the stock market.
AT&T Inc. and Verizon Communications Inc. have risen an average of 33 per cent over the past five years, after factoring in dividends.
Much smaller players, such as Sprint Nextel Corp., CenturyLink Inc., Windstream Corp. and Frontier Communications Corp., have fallen an average of 22 per cent.
For sure, there are some specific factors at work here beyond a company’s size – management competence, for example.
And yes, there are exceptions to the general observation that bigger companies have better-performing stocks. Rogers’ share price hasn’t done anything over the past five years, despite being roughly the same size as Telus.
But the averages suggest that mergers and acquisitions, along with diverse income streams, mean something in this day and age for the telecommunications sector – where streamlined operations and a national footprint are among the keys to success.
You can criticize big companies for being slow at adapting to change and for growing their earnings and revenues at a sluggish pace.
For telecom companies, though, the benefits of size outweigh these drawbacks.