Telecoms and Technology: Back in the black?

By Naomi Caine

23 February 2005

The world's flashiest mobile phone makers met in the south of France last week to unveil their latest handsets. The Cannes setting was appropriate for the high tech, glamorous phones of the future that will be able to play full length feature films and double as iPod music systems.

But will we buy them? Are consumers really ready for a mobile that is so much more than a phone?

British mobile phone operators paid a total of £22.5 billion five years ago to buy 'third generation' mobile phone licences that held out the promise that you could carry the internet in your pocket.

James Pike of Gerrard, the stockbroker, said: “The mobile phone companies spent a lot of money on the 3G licences and we still have to question whether the money was well spent. Do customers really want to access the internet over their mobile?”

Pike is nevertheless a fan of the sector – along with other experts. Graham Secker of Morgan Stanley, the investment bank, said: “Vodafone dominates the sector and is the third biggest company in the FTSE 100 index. Its performance has been disappointing over the past few months but I think investors are underestimating the growth potential of the mobile phone market. The company has also recently announced a big dividend increase.”

Vodafone told shareholders in November that it would double its interim dividend to 1.91p. The company also expects to increase its final dividend by 100%.

Hilary Cook of Barclays Private Clients also likes Vodafone. She said: “Its key markets are strong and it remains the cheapest UK telecoms stock. We view the recent drop in price as a key buying opportunity.”

Vodafone shares are trading at 140.25p and the price earnings ratio is 14.8. The dividend yield is 2.1%.

MM02 will shortly pay out its first dividend. Secker said: “The company has beaten expectations since it was spun off from BT. But the valuation argument for buying shares in mmO2 is not so strong.” The shares cost 130p, and are trading on a price earnings ratio of 21.5.

BT's more traditional fixed line business might seem dull in comparison with the wacky world of mobiles but experts warn investors not to write off the company. Pike said: “BT has incredible assets and its broadband business is good. Of course, there is a lot of competition in the sector, but we are pretty confident about the shares.”

Secker would also buy BT. He said: “The shares have recently enjoyed a good run, but they are not particularly expensive – they are trading on a p/e of 12.7. The dividend yield is also very healthy at 4.4%. Shares in BT cost 209.5p.

He urges investors to think of telecoms companies as safe, stable shares. “They are good, defensive stocks, rather like utilities.”

The same cannot be said of technology stocks. Safe? Stable? They are anything but. The sector is one of the most volatile. The internet boom of the 1990s sent technology stocks soaring. But in March 2000, the bubble burst. The UK's Techmark sector fell by 82% and the US Nasdaq index by 75%. There was a strong recovery in 2003, which took many people by surprise. Last year, the index climbed by about 17%.

Experts are cautiously optimistic. Pike said: “The global economic recovery should be welcome news for the sector. When companies are in good financial health they tend to spend money upgrading their computer hardware or software.”

The sector is divided between software and hardware companies – and it is small. You have to look to the US for the big technology companies such as Microsoft or Yahoo!.

David Scott of Redmayne Bentley, the stockbroker, warns investors to be cautious. He said: “Some people are turning a blind eye to the risks of the sector and we are starting to see some signs of dot com hysteria again. You have to be very selective - and choose your shares with great care.”

Scott thinks there are some exciting opportunities in the British market. He names nCipher, which makes encryption security products. Its clients include the government and Price Waterhouse Coopers. The shares are trading at 243.5p. He said: “It is a leading edge company that has money in the bank. Its market cap is only about £60m, but it has huge growth potential.”

He also likes SDL International. The company produces software that can translate web pages into another language. It also has an impressive client list that features Microsoft and Best Western International. Its shares cost 150p.

Some experts prefer a fund that invests in a range of technology stocks rather than individual shares. Justin Modray of Best Invest, an independent financial adviser, said: “Lots of people got their fingers burned during the dot com boom, and we are very wary of the sector. It should only make up a small percentage of your portfolio.”

Best Invest recommends only one technology fund – Soc Gen technology, which is run by Alan Torry. The scheme is one of the best in its class, however, it is down 68% over five years and has suffered a loss of 13% over one year.