The telecommunications services sector is by nature a very capital-intensive business with large spending on capital expenditures (CAPEX) in most years. Telecom operations are built on massive communications infrastructure and use a lot of equipment, requiring advanced fixed investments to ensure quality and up-to-date communications services to customers. Among the 10 commonly categorized business and investment sectors, the energy sector is often another leading CAPEX spender, but spending on CAPEX by energy companies has declined with contraction in the energy markets.

In 2015, the telecom and energy sectors clearly broke out from the crowd in regard to CAPEX, followed by the basic materials sector as a distant second. Trailing further behind are the industrials, utilities and technology sectors, all of which have much smaller capital investments. Larger CAPEX spending by telecom companies, as represented by AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), has been supported by their positive operating cash flows and ample cash holdings. The year 2015 saw continued buildup in CAPEX spending by the two leading telecom companies.

Telecom Companies

AT&T and Verizon rank the first and third respectively by market capitalization among all telecom companies traded on various stock markets in the United States. Both companies had uninterrupted revenue growth from 2011 to 2015 at an average annual sales growth rate of around 4%. In 2015, AT&T's sales almost reached $147 billion, and Verizon's sales closed in on $132 billion. Such growth is no small feat, given the companies' already enormous customer bases. The continued business expansions have relied on their persistent capital investments, designed to further build up the companies' respective communications capacity to accommodate for increased services needs.

Telecom CAPEX

In 2015, AT&T spent $19.2 billion and Verizon spent $27.7 billion on CAPEX. Meanwhile, the largest companies from most of the other sectors saw their CAPEX only in the single digits as measured in billions. For the five years from 2011 to 2015, AT&T consistently spent around $20 billion annually on CAPEX, while Verizon ratcheted up its CAPEX spending to $27.7 billion from $16.2 billion in 2011. All the while, CAPEX in the energy sector fell 41.2% in the fourth quarter of 2015, and total CAPEX for the Standard & Poor's 500 index (S&P 500), excluding the financials sector, decreased 9.8% in the same quarter on a year-over-year basis. All the data points to the telecom sector leading in 2015 CAPEX spending, which was supported by positive cash flow performances.

Telecom Cash Flow

The telecom business can be a cash-generating machine with recurring services revenue streams on a continuous, monthly or yearly basis. AT&T had operating cash flow of $35.9 billion in 2015, exceeding the amount of funds required for its CAPEX. Verizon performed equally well, generating operating cash flow of $38.9 billion in 2015, also surpassing its investment needs for CAPEX. When operating cash flow exceeds CAPEX, there is a positive free cash flow. Accumulated free cash flow replenishes a company's cash holdings, helping ensure the coverage of all operating expenses and maintain the company's ongoing operations. For example, research and development (R&D) spending can draw a large portion of a company's cash holdings, and R&D is arguably critical to telecom companies as they have gone through generations of LTE standards, now advancing to the so-called 5G.

Ample cash flow also provides companies with the resources for investment opportunities beyond CAPEX, such as the acquisition of business. Unlike gradual, organic growth through CAPEX, investing activities allow a company to expand into other desired business areas more quickly. In fact, both AT&T and Verizon made business acquisitions in 2015, with AT&T hooking up with DirecTV and Verizon now connected to AOL. The acquisitions are intended to strengthen and complement the two companies' existing telecom capabilities, and it is likely that the telecom sector should remain active in both CAPEX spending and acquisition of business.

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