Telecom Stocks Rise as Services Sink: How Investors Can Profit

Telecoms, long seen as one of the market’s quieter corners, has abruptly become a focal point for investors. After a major transaction this week, the industry is being recast as the latest playground for billionaires.

Andy Burnham, who is due to become prime minister on Monday, may yet arrive with plans that unsettle the gathering momentum.

His push for greater public ownership of key utilities could potentially stretch into telecoms. Thames Water, meanwhile, is rumoured this week to be edging towards a temporary form of renationalisation.

Even so, some of the world’s wealthiest investors appear convinced there is value to be found in Britain’s two telecoms giants, BT and Vodafone — a signal that ordinary investors may want to watch closely. The latest burst of attention follows French entrepreneur Xavier Niel’s purchase of a £4.4billion stake in Vodafone.

Niel, who briefly held Vodafone shares in 2022, bought the 16.2 per cent stake from Emirati group e& through his family investment vehicle, Vega.

BT has also attracted billionaire backing, with two prominent names on its shareholder register: Indian tycoon Sunil Bharti Mittal, who owns 24.5 per cent, and Mexican magnate Carlos Slim, who holds 4.2 per cent.

Since Mittal — known in India as the “telecoms tiger” — emerged as a major BT investor in August 2024, the company’s shares have climbed from 130p to 198p.

Mittal is thought unlikely to bid for the whole company, which owns EE, as the Government would almost certainly block any such attempt. But he is said to be making his presence felt as a director. Yet BT and Vodafone shares have still not kept pace with those of their European rivals. Can this trend now reverse? 

Or could Burnham’s stance on utilities stand in the way? He last month promised that ‘all parts of the UK are able to take greater public control of essential services such as water, housing, energy and transport’. 

The new prime minister appears convinced that such a move would improve standards and lower costs for consumers. So are telecoms to be avoided, or should you side with the billionaires? 

And what about other utilities stocks? Here’s how to position your portfolio for the Burnham era. 

BT 

BT’s army of 700,000 or so small shareholders may have been trusting that more generous dividends were in the offing. 

But Burnham could frustrate these hopes. Openreach, BT’s infrastructure arm, today provides fibre broadband to more than 23million premises. 

Subsequently, the vast expense of the roll-out will begin to fall, freeing up more cash for dividends. 

But far less money would be available for dividends, or anything else, if Burnham decides to act against Openreach’s monopoly. 

The lack of certainty about the new Government’s intentions means that most analysts believe BT shares are a ‘hold’ at 194p. But if you suspect the telecoms sector may be a low priority for the Burnham government, and that the influence of Mittal and Slim will be beneficial, the shares could be worth a bet. Brokers at Berenberg have set a target price of 300p. 

Bank of America’s target is 282p. 

Vodafone

In 2022, Niel declared Vodafone to be ‘too fat, too slow, too complex’. 

His return suggests confidence that he can speed the turnaround of the £28billion business, which owns the Three network. 

This merger, which should enable Vodafone to accelerate the pace of its 5G infrastructure rollout, is seen as one of chief executive Margherita Della Valle’s main achievements. 

But as Matt Dorsett, of Quilter Cheviot, points out, Germany remains ‘a key drag on performance’ – worrying, since this is Vodafone’s largest market. Its debt pile is another problem. 

But the 10 per cent jump in the business’ shares over the past week indicates that the stock market is enthused by the results that could be produced by Niel’s cost-cutting prowess. 

Most analysts consider Vodafone to be a ‘hold’. But Robert Grindle, analyst at Deutsche Bank, appears convinced that the combination of Della Valle’s strategy and Niel’s economising abilities could prove the catalyst Vodafone needs, rating the shares a ‘buy’ with a target price of 150p. 

Utilities

Whatever their problems, BT and Vodafone are not broken, unlike the water industry – whose woes are exemplified by this week’s dismal figures from debt-laden Thames Water. 

Shares in the listed water companies Pennon, Severn Trent and United Utilities reflect the crisis in this sector, and the risk of more draconian regulation. 

But the recent uplift in United Utilities’ share price, in the wake of the announcement of an upgrade programme, also indicates that traders suspect fullscale nationalisation of water would prove too expensive. 

Rhetoric on the desirability of public ownership is cheap. Putting plans into practice is a different issue, given that Britain’s borrowings already stand at £2.98trillion. 

Fears of more regulation also colour analysts’ views on the listed energy companies, which include Centrica, Drax, National Grid and SSE. But, significantly, analysts do not regard these stocks as a sell. 

This may be because, while there will be more pressure for lower bills for less well-off households, the artificial intelligence (AI) revolution is massively stepping up the demand for electricity. 

Burnham’s allies aspire to a new approach in which AI technology works for UK’s companies and consumers, rather than for Silicon Valley titans. This is one policy that investors in British shares can support.