The telecommunications sector is a relatively defensive sector comprised of a small number of large companies. Telecommunications services tend not to be sacrificed or substituted for other consumption when times are tight, so companies in this sector behave similarly to utilities. Financial performance does not swing wildly with economic growth conditions, but high financial leverage among the largest firms does increase the impact of revenue fluctuations on the bottom line and cash flow. Major players in the space have shown willingness to adopt flexible buyback policies that are sensitive to price, so valuation of telecom stocks is a likely determinant of future repurchase volumes.
Buybacks Over Time
Repurchase activity in the telecommunications sector has been volatile over time relative to other sectors. This is counterintuitive, as telecommunications services tend to be somewhat protected from economic cycles, so investors would normally expect stable returns of capital. However, the sector is dominated by a small number of large companies that have high leverage. Therefore, any changes made by one or two large players as financial conditions tighten can have a proportionately large impact on sector-wide data. The large telecommunications companies also preferred dividends as a method of capital return between 2006 and 2015.
Repurchase activity was strong in 2007 among large telecoms, reaching $13.5 billion for the year. Buybacks declined in 2008 and stayed low until 2012. Sector repurchase spending hit $12.8 billion in 2012 and $14.8 billion in 2013, before cash dividend payments rose sharply in 2014 and buyback activity stuttered. Share prices played a major role in determining buyback outlays, with rising valuations coinciding with several declines in cash returned to shareholders. The largest companies in the sector were willing to switch abruptly between cash dividends and repurchases, depending on conditions.
Buybacks by Company
AT&T Inc. (NYSE: T) was by far the largest contributor to telecommunications share repurchases between 2006 and 2015. The company spent $46.8 billion on buybacks over that period. These buybacks were substantial in 2006 and 2007, but stopped abruptly halfway through 2008 as a recession threatened the global economy. The company's cash dividend remained stable throughout this entire period. It reinstated an aggressive repurchase campaign in 2012, peaking at $5.8 billion in the first quarter of 2013. Quarterly buybacks dwindled over the following quarters before falling back to a historically lower level in the second quarter of 2014. A sharp increase in cash dividends during 2015 was not matched by a step-up in buybacks, which remained low.
Verizon Communications Inc. (NYSE: VZ) is the second-largest telecom firm in the Standard & Poor's (S&P) 500 Index, with a market cap of $208 billion, $30 billion less than AT&T. Verizon's repurchase outlays were $11.6 billion over the decade that ended in 2015. This amount was less than 25% of AT&T's buyback amount, even though Verizon's market cap was 87% as large as that of AT&T, as of May 2016. Verizon generally spent less on repurchases leading into the recession and resumed buybacks later than AT&T afterward, and $4.2 billion spent on repurchases in the first quarter of 2015 represents a large portion of the total outlays during the decade.
CenturyLink Inc. (NYSE: CTL) was not active with buybacks before 2013, when it began spending close to $400 million each quarter on buybacks. Minimal cash was returned to shareholders by the company prior to 2009, but a cash dividend in excess of $700 million was instated during the buyback period. The cash dividend grew until 2013, when the company elected to return capital with a large buyback instead. CenturyLink's repurchase outlay declined in 2014 as its share prices rose, then rose again in 2015 as its share prices declined. The company closed out 2015 with $279 million of shares repurchased in the fourth quarter.
AT&T, Verizon and CenturyLink have all experienced stock price appreciation year to date (YTD) through May 2016. Repurchase activity was moderate compared to historical levels in 2015, and the buyback policies of large telecommunications companies have been sensitive to evolving price changes in the past. In the event of another recession, investors should expect buybacks to decline from the telecommunications sector. Repurchases should not rise materially without a decline in share prices.