Stocks on the Move: Introducing the Communication Services Sector
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Stocks on the Move: Introducing the Communication Services Sector

At the end of this month, the Global Industry Classification Standards (GICS©) framework that investors use to classify companies into distinct groupings will be undergoing the largest change in its nearly 20-year history. The current telecommunications sector will be renamed communication services and expanded to include companies within the current consumer discretionary and information technology sectors. The change is in effect an acknowledgement of the evolution of companies that previously had been lumped together as “tech” as well as the many different ways in which we routinely communicate and consume entertainment compared with the legacy telecom concept.

The impact to the weightings of the three impacted sectors within the S&P 500 is significant. Following the change, the information technology sector is expected to shrink from approximately 26% of the index to 22%, while the consumer discretionary sector will be reduced to about 10% from 13%. In contrast, the newly-named communications services sector will comprise approximately 10% initially. Notably, the classification changes impact three of the five often referenced FAANG stocks. Facebook, Alphabet (parent company of Google) and Netflix all moving to the communication services sector. Other names that will be joining the newly-named communications services sector include Walt Disney, Comcast and Twitter.

Beyond updating grouping to allow for more apples-to-apples comparisons, the reclassification does have potential impacts for investors to consider. In particular, those investors who have formed a view (positive or negative) on any of impacted sectors would be wise to give thought to the impact of the changing sector compositions.

For example, while the current telecom-focused companies (including Verizon and AT&T) will remain a part of the new communications service sector, the characteristics of the newly-named sector will look significantly different following the change.  The telecommunications sector has long been viewed as a defensive holding for investors, offering a large dividend yield, but muted prospects for growth. Following the reclassification, the dividend yield is expected to be reduced from close to 5% to around 1%, while valuation measures like the sector’s P/E ratio will increase.

In short, the coming changes are more than simply changing labels. Whether the reclassification should prompt investors to make changes to their portfolios or not is dependent on individual situations, but all investors would do well to understand the coming moves.