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Verizon (VZ) and AT&T (T) shares recently sold off on the back of a Wall Street Journal report that shed negative light on lead-covered cables found in the telecom infrastructure across America. The result of the jarring headline was that Verizon and AT&T touched lows not seen in 15 and 30 years, respectively. From a broader perspective, the slump in these telecom stocks has been lengthy, and the downtrend has proven very difficult to reverse.
Still, given the healthy dividend yields they offer, deep-value investors might be curious if now the time to go bargain-hunting on AT&T and VZ?
Lead Pullback: A Tough Pill to Swallow
Since the lead cable report first broke on July 9, investors in Verizon and AT&T have had a few weeks to digest this news. While cleaning up those toxic cables will cost a pretty penny (around $60 billion for the telecom industry as a whole, according to one estimate), the immediate negative reaction in VZ and T turned out to be overblown.
AT&T's management team was quick to note that lead cables comprise less than 10% of its network. There's definitely lead risk there, but not as much as the initial reaction suggested (AT&T stock fell more than 10% in two sessions). Verizon's lead exposure is even lower than that of AT&T. New Street Research's Jonathan Chaplin now thinks AT&T's and Verizon's exposure could cost the firms around $35 billion and $8 billion, respectively - down from his initial projections.
In any case, added expenses are never ideal, especially given each company's heavy debt load and the hefty expenditures required to stay competitive in the wireless scene. Still, the bill could have been much worse, especially for a long-time telecom titan like AT&T.
Regardless, I don't think you can blame investors for rushing to hit the sell button on AT&T, given it's an old company with a lot of legacy assets. Further, it's been a perennial underperformer that many investors just love to hate.
As the two hard-hit telecoms move off of lows not seen in more than a decade (three decades, for AT&T), it will be interesting to see how each firm plans to close the gap with T-Mobile (TMUS), a leading telecom that looks well-positioned to keep taking market share away from its two older rivals.
AT&T and Verizon have had years to turn the ship around. Still, that investor patience has been met with devastating losses. And as new expenses mount, dividend reductions can't be ruled out.
AT&T Stock: Fresh Off 30-Year Lows — Any Sense Getting in Now?
AT&T has been busy looking for places to cut costs, having recently announced its intent to trim spending by another $2 billion or so over the next three years. Indeed, cost-cutting can be a great way to give profitability a jolt. That said, cuts can only go so far. At the end of the day, you've got to spend money to make money, especially in the competitive wireless scene that T-Mobile seems to be running away with.
Unfortunately, AT&T has debts to repay and a massive dividend commitment. At writing, the dividend yield stands at a towering 7.5%. That means yet another dividend cut may be in the cards as the yield begins to swell again.
In light of lead cleanup woes, I do think AT&T would be better off slashing its dividend again, perhaps to zero. The dividend is costing the company around $8.028 billion per year. That's money that could have gone toward trimming away debt, or wireless infrastructure investments in a bid to claw back subscribers from peers like T-Mobile.
While I do think AT&T can maintain its dividend while moving forward with its turnaround, I don't think it's the best move. It's about time the telecom companies took a page out of the playbook of T-Mobile: Minimize the dividend (to zero, if possible) to maximize growth and accelerate the turnaround.
Verizon Stock: Coming Off 15-Year Lows — No Easy Way to Turn the Tides
As lead cable headlines gripped the attention of investors, Verizon quietly reported a pretty good quarter. Wireless service revenue rose nearly 4%, up 1% from the prior quarter. Arguably, wireless growth is the key to catching up in the telecom scene. There's still a lot of room to run as the 5G boom continues, and if Verizon can play its cards right, its share price reversal could be sudden and sharp.
That said, Verizon's massive 7.6% dividend appears to be weighing the stock down as it looks to turn the tides and form some sort of bottom. If pressures mount, one has to think the dividend may need a visit to the chopping block. In any case, such a reduction could bode well for the firm as it looks to get back on track.
For now, though, Verizon's dividend looks safe and sound, as the firm looks to proceed with a turnaround while keeping its shareholders happy.
Bottom Line
Verizon and AT&T continue to be falling knives that could keep hurting those who dare try to catch them. I think it's about time that both firms consider reducing their dividends drastically, as I think there are far better uses for that capital in the competitive telecom sector.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
