July 11, 2017 / 10:10 PM / a month ago

U.S. index providers propose overhauling telecom benchmark

NEW YORK (Reuters) - Two major U.S. stock index providers on Tuesday proposed a major overhaul of how they classify telecommunication companies within their widely used equity benchmarks to reflect changes in the industry over the last two decades.

S&P Dow Jones Indices and MSCI Inc (MSCI.N), which together manage a set of industry definitions called the Global Industry Classification Standard (GICS), propose renaming the sector .SPLRCL and including a host of companies not considered pure telecoms, they said in a statement.

The proposed Communication Services Sector could include telecom companies as well as some media, entertainment, consumer internet and digital services companies that currently belong to the consumer discretionary and information technology sectors.

They did not disclose which companies could be moved into the new index. Those other industry groups currently include corporate titans, such as Facebook Inc (FB.O), Google parent Alphabet Inc (GOOGL.O), eBay Inc (EBAY.O) and Comcast Corp (CMCSA.O).

"You're looking at everything in there, and it could also lead to new sub-industries within existing ones. The existing groups could be totally changed," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "Nothing has been predetermined and set."

After years of consolidation and diversification, today's telecom sector is vastly different from when the index was created in 1996, a time when cellphones were a luxury and the internet was not ubiquitous.

The consultation will start on Tuesday and potential changes to take effect in 2018 will be announced in November, the statement said.

S&P Dow Jones Indices is a venture of S&P Global Inc (SPGI.N) and CME Group Inc (CME.O).

Reuters reported in May that the index providers were considering restructuring the once-hot index, which has shrunk to just four companies from 14. Telecom companies are desperately trying to diversify away from the competitive cellphone and internet industry by adding TV and home security services.

Regional telecom operator CenturyLink Inc (CTL.N) plans to buy fiber network operator Level 3 Communications Inc LVLT.O later this quarter, which would leave the S&P 500 telecom index with just three companies.

Mergers will further shrink the percentage of revenue from traditional telecommunications as AT&T Inc (T.N) - the sector's biggest company - is merging with media company Time Warner Inc (TWX.N).

Unlike the other 10 GICS sectors, the S&P 500 telecom segment is so small there is not a single exchange-traded fund to mirror it, given that a fund holding just a few stocks would fall short of regulatory requirements. Instead, telecom ETFs include smaller companies outside the S&P 500 and other industries.

Since slow-growing telecom operators are notable for their high dividend yields, some investors argued they should be added to the utilities index.

Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama, said it "doesn't seem realistic" to include big tech names with telecom firms.

"You could make a more rationale case for putting some of the media companies in with telecom."

Reporting by Trevor Hunnicutt and Caroline Valetkevitch; Additional reporting by Sinead Carew; Editing by Daniel Bases and Leslie Adler

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