As a manager of a thematic investment process built around identifying trends in social, economic and political spheres, I have been interested to note how the nature of consumer addictions has evolved in recent years.
Studying changes in such trends throws up some interesting investment opportunities. By way of example, the rise of data consumption, and the housing affordability crisis that this country is currently facing, has led us to rotate out of more traditional income sectors such as tobacco, and into telecoms.
Why? For any investors with teenage children, you will be acutely aware of their addiction to data. An acquaintance recently offered his 13-year-old son £100 if he didn’t touch his phone for a week. He lasted 23 hours.
As part of our analysis, we considered how this level of addiction ties in with the housing affordability crisis with which this country is struggling, illustrated by the difficulty young people have in getting onto the property ladder.
In a recent study, the Office for National Statistics found that the number of 20 to 34-year-olds living with their parents had increased to 3.3 million in 2013, the highest level since records began in 1996.
As more households become family dwellings for longer, demand for multi-faceted “quad-play” (fixed line, mobile, TV and broadband) telecoms services – available in multiple rooms and on various devices – should only increase. This not only suggests average revenue per user increases, but a stickier customer-provider relationship. This is relevant for equity income investors, as demand for data and systemic changes to households leads to a durable stream of revenues for telecoms stocks.
While telecoms’ defensive characteristics shouldn’t come as a surprise, we think the sector’s ability to generate recurring revenues and sustainable dividend growth is still under appreciated at current share price valuations, which, generally speaking, are at a discount to the market. The exception is Vodafone whose price-to-earnings is distorted by its capital spending on its Project Spring initiative.
UK and US telecoms groups have developed content-led “quad- play” offerings offering defensive growth in sales, earnings and dividends and strong content-led customer loyalty. This is why we own BT, Vodafone, AT&T and Verizon within a global telecoms macro-theme.
Given that we consider the investment credentials of tobacco to be gradually eroding, investors would do well to consider telecoms as the heir to tobacco’s “equity income addiction” title – and the beneficiaries of dependence on mobile data consumption.
Illustrating the vast contrast in prospects, it is worth bearing in mind that, while British American Tobacco estimated an industry cigarette volume decline of 2.3 per cent in 2015, Cisco reported that global mobile data traffic grew by 74 per cent over the year.
We are finding more and more evidence that reliance on data should be treated as an addiction. A September 2015 Global Mobile Consumer Survey from Deloitte found that 44 per cent of young people in the UK pick up their phone more than 50 times a day, with 55 per cent doing so within 15 minutes of waking up.
Across the pond, this addiction appears just as strong. A survey by The Boston Consulting Group found almost a third of adults would rather give up sex than their mobile phones, while an Ericsson study demonstrated an emotional dependence on mobile devices; a 38 per cent heart rate increase in those watching badly buffered video content.
All the aforementioned trends reaffirm our belief in our global telecoms theme.
Stephen Bailey is manager of the Liontrust Macro Equity Income fund