Shares: Telecoms on hot line to profits

THE telecommunications industry is one of the great growth areas of the late 20th century, and this is reflected in the performance of the leading UK telephone network shares.

It is a good area for investors who like a combination of growth, reasonable income and rising dividends. The risks come from growing competition and changing technology, which are giving telecommunications some of the characteristics of the fast-growing but volatile personal computer industry. Even so, the companies with the dominant shares of the market tend to keep those positions. Investors unsure which will win can simply buy all four of the leading UK shares.

There are three principal reasons for expecting continuing strong growth in turnover and profits for telecommunications shares. First is the fact that growth in traditional fixed-line telephone usage has been exponential since the war. Each UK phone is used on average for four minutes a day. Second is the growth of new services, such as freephone facilities, which have become a huge market in the US. Third is the changing marketplace, with fax lines spreading into private homes and the mobile phone revolution, which is on the brink of moving into the mass market.

The supreme UK-quoted telecommunications investment is Cable & Wireless. For holders, it has been a licence to print money. A chart in the interim report shows that an investment of pounds 1,680 in Cable & Wireless shares at the time of the November 1981 flotation would, by September 1992, have grown to pounds 20,000 in share values and accumulated dividend income. And since September, the shares have risen from 565p to 738p.

The group's investment attractions include a near 60 per cent stake in Hong Kong Telecom, which is growing profits at a 16 per cent rate, based on booming revenue growth in Hong Kong and south China. It also owns 80 per cent of the UK's second telephone network, Mercury, which was valued by the recent sale of a 20 per cent stake at pounds 2.4bn. Other assets include telephone operations in about 40 countries, plans to become a global player in mobile phones and an international cable network. New management has been refocusing the group in a way that wins City admiration, while devaluation benefits for a big dollar earner prompt analysts to forecast profits reaching pounds 800m for the year to 31 March 1993 and pounds 1bn in the current year. Even that implies a not especially cheap price-earnings ratio of 17.6, but the shares look a strong buy for the long term.

British Telecom cannot match that level of excitement, but has done well for investors. Earlier tranches were sold at 130p in 1984 and 350p in December 1991 and I would be surprised if the final tranche this summer does not also prove a profitable buy. The regulator is forcing BT to lower its call charges, but the utility can cope with this and still keep profits climbing because the lower charges stimulate higher call volumes that more than compensate in revenue terms.

As an investment, the shares have the classic utility appeal: offering a solid income that should rise at well above inflation, perhaps by as much as 8-10 per cent, for the foreseeable future. On stockbrokers' estimates for the new financial year, BT shares, at 443p, are on a yield around 5 per cent - excellent value for a group with substantial restructuring costs behind it and the benefits of economic recovery to come.

Most sensitive to economic recovery are the two cellular phone shares, Vodafone at 382p and Securicor, part-owner of Cellnet, at 960p. The potential good news of a reviving economy is offset by investors' worries about what will happen to profit margins of up to 50 per cent when Mercury and Hutchison launch their PCN networks in the summer. But Vodafone, for example, intends to participate in the expected transformation of the UK cellular industry into a mass market with at least 5 million users by the end of the century. On a p/e of less than 20 on expected 1993-4 earnings per share, and with an impressive record of sustained growth, Vodafone shares could come to look cheap.