2 Top Stocks in the European Telecoms Sector
Javier Correonero - 2 April, 2025 | 12:13PM
European telecommunication stocks performed well in the first quarter of 2025 due to the strong performance of the region’s stock indexes overall.
This rally pushes valuations closer to fair value and brings average dividend yields down to 5.5% from 6.7% a year earlier. Despite high headline yields, some firms face dividend sustainability issues, as payouts exceed free cash flow. In contrast, operators like France’s Orange ORA, Sweden’s Tele2 TEL2B, and the UK’s BT Group BT.A offer more resilient 5%-6% yields underpinned by disciplined capital management.
Although we prefer firms with good capital allocation, a cost-conscious mentality, and prudent dividend policy. Streamlined, domestic-focused firms like Deutsche Telekom DTE and BT are outperforming sprawling conglomerates.
Key Issues for the European Telecoms Industry
• Fragmentation and regulation are currently hindering European consolidation efforts.
• Europe has many regulatory layers, with each country’s regulator having different views
• Networks are in different stages of development in each country.
• Governments own equity stakes in incumbents and have M&A veto rights, as telecoms are considered strategic assets.
• Pan-European telecoms like Telefonica, Orange, and Vodafone have realized little cross-border efficiencies for two decades.
• In markets such as Spain and Italy, aggressive price competition and high churn continue to undermine profitability.
Key Europe Telecom Stock Picks
Key Morningstar Metrics for BT Group
Despite pressures in its cost base coming from wage inflation and alternative broadband networks that are stealing lines from it, we believe BT is faring well in a competitive market. First, it’s managing to maintain revenue growth in its consumer division with price increases that offset wage pressure from unions. Second, Openreach is still showing sizable operating leverage, with EBITDA growing at mid- to high single digits thanks to the scale of being the largest network in the country.
BT is also ambitious with its long-term cost plan; it intends to reduce its headcount from 130,000 employees in 2023 to 75,000-90,000 by 2030. We believe cost-cutting is paramount in the no-growth telecommunication industry. We see BT’s dividend as maintainable and believe management has room to steadily grow it in coming years.
Key Morningstar Metrics for Orange
Orange has been overdelivering on its promises over the past 24 months. EBITDAaL, which is earnings before interest, taxes, depreciation and amortization and after lease expenses, grew 2.7% in 2024, in line with the firm’s ambition of achieving low-single-digit growth. For 2025, Orange raised its EBITDAaL guidance from low-single-digit growth to around 3%, which we view favorably. Orange reported organic free cash flow of EUR 3.4 billion, surpassing its EUR 3.3 billion target, while increasing its 2025 guidance to more than EUR 3.6 billion, up from the previous EUR 3.5 billion.
We commend Orange for its cost-cutting efforts and hope to see further progress in 2025. Large telecom conglomerates often struggle to reduce costs in absolute terms due to their broad geographical presence, redundancies, legacy IT systems, and old ties with governments. Orange managed to cut its two largest cost items, external purchases and labor expenses, by 0.7% and 3.3%, respectively, over the full year. This contrasts with peer Vodafone, which has seen its costs rise over the past 12 months on an absolute basis despite claiming cost efficiencies. Management has committed to maintaining a dividend floor of EUR 0.75 in 2025. If it fares well in 2025, we see room for a slight dividend increase.
This article is an edited version of the Telecoms Europe: Q1 2025 industry report published on Morningstar Direct and written by Javier Correonero and Jack Fletcher-Price. The article was compiled by Jonathan Gorringe.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.