Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



AT&T Feels the iPhone Pinch

Shares of wireless giant AT&T (NYSE: T  ) were under pressure during last night's after-market session as well as in pre-market trading this morning, although they were able to claw their way back to green turf shortly after the opening.

When pensions attack!
The culprit was a form 8-K that Ma Bell filed including tidbits on various fourth quarter happenings. The company says it expects to record a non-cash pre-tax charge of roughly $10 billion due to actuarial gains and losses on its pension and post-employment benefit plans.

The charge resulted from the company lowering its assumed discount rate to 4.3%, causing an actuarial loss of close to $12 billion. That's a full 1% lower than the 5.3% it was assuming a year ago. This is because lowering the assumed discount rate increases the net present value of pension liabilities, which it owes to retirees under the plan.

The hit was mitigated by a gain that was $1.9 billion higher than the company's assumed rate of return of 8.25%. Macroeconomic uncertainties are also causing AT&T to reduce its long-term expected rate of return by 50 basis points to 7.75%.

Most companies nowadays shy away from using pensions and other defined benefit plans for employees, but a lot of older companies still have them. Instead, companies tend to prefer defined contribution plans like 401(k)s nowadays.

Pensions are very much a risk factor in their own right since the company bears all of the investment risk while guaranteeing future benefits. The accounting behind them is a total nightmare because of the plethora of assumptions required in forecasting that far out into the future, including discount rates, expected returns, employee retention rates, average retirement ages, how long retirees live in retirement, and average salary increases, among many others. What a mess.

The company is preparing to report fourth quarter and full year 2012 results on Jan. 24, but at the end of 2011 its pension was underfunded by $10.2 billion. Investors will have to wait for the 2012 annual report to get a glimpse of where the plan now stands, but this charge won't help.

Pension happenings are included only in consolidated results, but don't affect operating results.

When iPhones attack!
As far as operations go, AT&T said it sold 10.2 million smartphones in the fourth quarter, a little more detailed than it previously provided last week. At the time, Ma Bell said that included a record number of Android and Apple (NASDAQ: AAPL  ) iPhones.

The filing last night added that the "high subsidies on these devices" are going to hurt operating income, margins, and earnings in the fourth quarter. The iPhone is a notorious margin-sucking beast due to its subsidies, and AT&T's smartphone sales have always been predominantly iPhones. In fact, iPhone activations as a percentage of AT&T's total continues to increase, further pinching its results.

Source: Earnings press releases.

Apple fetches an estimated $425 subsidy per iPhone, and AT&T's prior iPhone record was 7.6 million units in Q4 2011. That means the company is likely on the hook for at least $3.2 billion in subsidies, but that bill could easily approach $3.5 billion if 80% of those smartphones were iPhones. We won't know the exact mix until AT&T reports, but for context, rival Verizon (NYSE: VZ  ) recently said its holiday smartphone sales of 9.8 million activations were driven by a "higher mix of Apple smartphones."

When the iPhone 4S launched in 2011, AT&T saw a huge spike in iPhone sales, jumping from 56% of smartphones to a whopping 81% of smartphones.

Once you subsidize, you can't stop
It's no secret that carriers aren't particularly fond of subsidies, especially those sent to Cupertino since they're far higher than what they have to pay for rival devices.

The problem is that weaning themselves off subsidies is easier said than done. T-Mobile is going to experiment with that notion this year. Verizon CEO Lowell McAdam recently said that Big Red would be open to such a move -- except consumers love them.

Ultimately the consumers have the final say, and they're quite fond of the subsidy model. Carriers in other countries that have never adopted the subsidy model can resist adopting the practice, but ones that have given consumers a taste of subsidies can't stop because consumers just want more.

Apple has been a longtime pick of Motley Fool superinvestor David Gardner, and has soared 215% since he recommended it in January 2008. David specializes in identifying game-changing companies like this long before others are keen to their disruptive potential, and he helps like-minded investors profit while Wall Street catches up. I invite you to learn more about how he picks his winners with a free, personal tour of his flagship service, Supernova. Inside, you'll discover the science behind his market-trouncing returns. Just click here now for instant access.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2013, at 9:21 PM, peto3 wrote:

    Evan, do we really need more of the Apple carrier subsidy drama for the 10,000th time? That's really scraping the bottom of the barrel for a few lousy clicks, isn't it? Why not at least point out how the carriers benefit from carrying iPhones. You know, just to provide a balanced and intelligent report. No, I guess not - that would betray too much journalistic integrity ...

  • Report this Comment On January 19, 2013, at 1:14 AM, SimchaStein wrote:

    ATT stock has done quite over the last few years while selling a ton of iPhones. Problem? Subsidies? iPhone customers are high-end, spend more. Of course it works out for AT&T.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2204733, ~/Articles/ArticleHandler.aspx, 5/25/2016 8:47:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,851.51 145.46 0.82%
S&P 500 2,090.54 14.48 0.70%
NASD 4,894.89 33.84 0.70%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/25/2016 4:00 PM
AAPL $99.62 Up +1.72 +1.76%
Apple CAPS Rating: ****
T $38.62 Up +0.12 +0.31%
AT&T CAPS Rating: ****
VZ $49.85 Up +0.27 +0.54%
Verizon Communicat… CAPS Rating: ****