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Investing in Communication Stocks

Updated: May 7, 2021, 6:22 p.m.

The communication services sector encompasses two kinds of companies. Information technology companies use computers and software to help businesses and individuals stay connected, while telecommunications companies provide infrastructure and services for distributing information. Television broadcast networks, broadband internet, and mobile wireless networks are all part of the communication sector.

Share price gains in recent decades for leading telecommunications companies have lagged behind those of the top tech companies. But no other broadly defined sector has driven more economic expansion over the past century, and communications companies will continue to power growth in the decades to come.

The best communication stocks of 2021

Verizon

Verizon (NYSE:VZ) has more mobile wireless subscribers than any other U.S. carrier. Its large user base and top-rated service position the telecom leader to significantly benefit as consumers and businesses adopt 5G technology.

Verizon is mainly focused on providing mobile wireless service, but it has media ventures of its own. The company is facing some near-term headwinds for its advertising-based businesses and must cope with wireless service churn as it continually seeks to bring new customers into its network.

Verizon’s business still looks sturdy overall, with 5G wireless service poised to be a substantial growth driver. Digital advertising still has the potential to be a performance catalyst, and the company reliably pays an attractive dividend.

AT&T

This company operates the second-largest mobile wireless network in the U.S. and is the country’s largest pay-television provider through its DIRECTV subsidiary. AT&T's (NYSE:T) WarnerMedia division is also one of the world’s biggest and most influential entertainment businesses.

The coronavirus pandemic and resulting economic conditions have intensified the cord-cutting pressures facing DIRECTV, but AT&T has already partially divested from the business and is restructuring it as a new company. AT&T’s WarnerMedia entertainment unit owns franchises and production studios, including the Cartoon Network, DC Comics, and many popular television series. The telecom giant is also strongly focused on growing its HBO Max streaming service.

Verizon's telecommunications segment is undertaking a 5G network initiative, meaning that the company should benefit from growing demand for 5G service in both the consumer and enterprise markets. The transformation effort may take some time, but the telecom giant already reliably pays a high dividend.

Netflix

The pioneer of subscription-based streaming video in the U.S., Netflix (NASDAQ:NFLX) has built a massive audience. The company is quickly expanding its business around the globe and is still adding to its content offerings.

Unprecedented pandemic-related conditions boosted demand for streaming content, resulting in new subscribers to Netflix’s service. The streaming entertainment leader is significantly benefiting from both the ongoing transition away from cable television and the rising global demand for entertainment media

Facebook

With billions of users across its collection of social media platforms, Facebook (NASDAQ:FB) is in many ways a communications company. The tech giant generates significant revenue from digital advertising services integrated across its namesake social network and Instagram, and the company is well-positioned to expand into e-commerce and digital payments processing. In addition, Facebook-owned WhatsApp is a leading messaging service that could drive substantial additional growth for the company.

COVID-19-related economic uncertainty has caused advertisers to limit spending, but social networks and the digital advertising they support are here to stay. Digital ad sales will likely increase as the pandemic subsides.

Alphabet

Alphabet’s (NASDAQ:GOOG)(NASDAQ:GOOGL) Google is the world’s top search engine and digital advertising platform, and Alphabet provides other leading communication-related products and services. YouTube is the most-watched video-streaming service in the U.S., and Gmail is the world’s second-most-used email client. The company’s Android platform is the world’s most-used mobile operating system and supports a huge ecosystem of third-party applications.

Like Facebook, Alphabet derives the majority of its revenue from digital advertising. Near-term challenges aside, Alphabet is poised to continue profiting from its leadership in the search engine space. The tech company is also heavily investing in artificial intelligence, which likely will further strengthen its core ad business and create new opportunities for growth.

An internet modem with cables attached

Image Source: Getty Images

How to analyze communication stocks

The communication sector is broad and encompasses many different fields, so it’s generally best to compare communication companies that mostly operate in the same industries or are at similar stages of growth.

A communication company's user-base size and engagement trends can provide insights into how a business or product is performing relative to the competition. Investors can estimate how much per-user revenue or earnings a company, business segment, or individual service is generating and can gauge how the company or unit's performance might be impacted if per-user monetization or the overall network size significantly changes.

Companies that return cash to shareholders through dividends can deliver strong results even if the businesses' earnings increase relatively slowly. Within the communication services sector, telecommunications companies are more likely to pay dividends than information technology companies, although their earnings growth is typically slower. When analyzing dividend-paying stocks, the key metrics include dividend yield and the number of consecutive years a company has increased its payout.

Investors should also pay attention to a company’s expenses and whether those expenses are generating profit. For telecommunications companies, it’s important that capital expenditures -- money that companies invest to acquire and maintain crucial infrastructure such as internet cables, satellites, and cell towers -- are kept under control. For information technology companies, research and development and content spending are indicators of how much companies are prioritizing the creation of technology and products that can drive growth.

The communication sector is poised to grow

Communication services and content will continue to catalyze economic development. With computing platforms playing growing roles in everyday life and 5G internet enabling dramatic improvements in network speeds, further advancements are possible in fields such as autonomous vehicles, smart cities, and virtual reality. Investors who buy shares in top communication companies and hold those stocks for the long term are likely to enjoy strong returns.

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