The beginning of 2016 has been one of the most volatile periods in history for stock markets around the world, but there’s one group of equities that has managed to avoid most of the turbulence.
Telecoms and media stocks such as Vodafone (LSE: VOD), BT (LSE: BT.A) and SKY (LSE: SKY) are highly defensive and become a safe haven for investors in times of turbulence.
Indeed, over the past 12 months, all three of these companies have outperformed the wider FTSE 100 by more than 10% excluding dividends. In fact, BT has outperformed the UK’s leading index by almost 20%, and it’s reasonable to believe that this performance will continue over the next 12 months.
Economic moats
Warren Buffett, who many claim to be the world’s greatest investor, often talks about business moats or competitive advantages. Sky, BT and Vodafone all exhibit the traits of such economic business moats. Specifically, all three of these companies have a leading position in a large market, and the industries they operate in have high barriers to entry. For example, for a new competitor to spring up and take on Vodafone, they would have to spend tens of billions of dollars on new network infrastructure, marketing and a store network. There are few, if any, companies that would be able to do this without taking on a crippling amount of debt.
Similarly, it’s virtually impossible for a new competitor to come into the UK telecoms market and build a network to rival that of BT. It would take years just to get planning approval for the infrastructure required. Then there’s Sky, which has shown its resilience and strong relationship with customers over the past few years as competitors such as Netflix, Amazon, BT and other content streaming providers have all started to nibble away at the company’s market share. However, despite this competition, Sky’s pre-tax profits are up around 50% since 2011 and City analysts are forecasting a further 11% growth in EPS this year.
Not cheap
Unfortunately, due to their one-of-a-kind nature, Sky, BT and Vodafone’s shares aren’t cheap. Sky’s shares currently trade at a forward PE of 16.5 and yield 3.1%. BT’s shares trade at a forward PE of 14.7 and yield 2.5%. And Vodafone shares trade at a forward PE of 38.3 and support a yield of 5.1%. These premium valuations may put some investors off, but sometimes you have to pay for quality and these three companies are all quality investments that are worth paying for— their outperformance over the past three and five-year periods is a testament to this. It’s also worth paying extra for the economic moats these businesses have.
Overall, you should consider Sky, BT and Vodafone’s shares for their defensive nature and market leading positions. Further, it’s unlikely these businesses will go under anytime soon.
