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ETF Specialist

A Dividend-Paying ETF in a Consolidating Industry

This low-cost telecom fund offers exposure to the titans and the small fries and provides a healthy payout to boot.

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Morningstar's Take
The United States telecommunications industry is in flux, from the top down. For quite some time,  AT&T (T) and  Verizon (VZ) had consolidated much of the telecom space, to the point that the sector more or less consisted of those two heavyweights, and then everyone else. Recently, however, a new round of consolidation has been taking place, driven by a desire for greater economies of scale, more telecom spectrum, and a bulwark against cable operators' incursions onto what historically has been telecom firms' turf. Deals in the past 24 months have included  T-Mobile (TMUS) buying MetroPCS, AT&T acquiring Leap Wireless,  Sprint (S) bringing Clearwire under direct control, and Verizon buying  Vodafone's (VOD) 45% stake in Verizon Wireless.

Most recently, the long-rumored pairing of Sprint and T-Mobile--which many observers had expected to be announced by the end of July 2014, despite likely antitrust challenges--turned out to be a mirage. French telecom Iliad SA recently made a surprise $15 billion offer for T-Mobile, which T-Mobile thus far has not accepted. In the wake of that offer, Sprint, which now is controlled by SoftBank and still operating in the red, abandoned its plans this week to pursue T-Mobile and also announced that it would replace its CEO and try to turn its business around.
For the most part, further mergers and acquisitions activity is a positive for the industry itself. For industry investors, however, we see consolidation as a mixed bag. AT&T and Verizon currently have industry-leading margins by a wide amount. As the players in the next tier consolidate and strengthen, it could be a modest negative for those two titans. At the same time, consolidation would help those smaller firms improve their cost structures and move up toward acceptable profitability over the long term.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.