AT&T and Verizon Gain as Dow Falls 200 Points

Pension benefits helped AT&T and Verizon in 2013, and it's one reason they're not plummeting along with the Dow Jones Industrial Average today.

Jan 23, 2014 at 3:30PM

A surprisingly weak reading of manufacturing activity in China has hit U.S. stock markets hard today. The Dow Jones Industrial Average (DJINDICES:^DJI) has responded by falling 1.15% as of 3:30 p.m. EST, with 25 of 30 components dropping into the red.

The big news was a HSBC/Markit China manufacturing purchasing managers index falling to a six-month low at 49.6. A reading below 50 indicates contraction and this sparked early fears that China's economy won't maintain the robust growth we've seen in the last decade. This is an early reading for January, so the index will be revised before the month's final figures are released.  

Ironically, slower manufacturing in China may be good for U.S. companies which compete with the Asian power in many industries. By contrast, the same U.S. PMI reading was 53.7, indicating expansion in manufacturing here at home. It's possible that manufacturers here are stealing work from China as its labor costs become less of an advantage over the U.S.  

Telecoms buck the trend
Two stocks not experiencing the same fall today are AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), respectively up 0.7% and 1.1%. Yesterday, AT&T said it would see a $7.6 billion noncash benefit from its pensions due to larger than expected gains last year and falling obligation costs. Verizon got a $6 billion benefit from pensions earlier this week due to similar dynamics.  

Pension accounting can be very confusing, but one part of these gains was due to the outstanding market performance last year. The other driver is a change in assumptions of future returns and costs years in the future. AT&T raised its assumed discount rate of future costs to 5%, which lowered the amount of assets it was required to have on hand, resulting in the noncash gain.

The change can be explained with a simple example. Let's say you owe someone $100 in 30 years and want to invest enough to cover that debt. It you assume a 4% annual return then you need to invest $30.83 to have the $100 in 30 years. But if the return you expect is raised to 5%, the amount invested only needs to be $23.14.

Pensions are much more complex than that and require a lot more assumptions, but that's one way to look at how a company can have such a large gain from a pension. These aren't the kind of consistent long-term gains investors are looking for, but it's a one-time event that's still good for the balance sheet. Pension costs have been a drag for corporate America for years, so it's good to see them turn around and be a benefit for these two companies.

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Fool contributor Travis Hoium manages an account that owns shares of AT&T; and Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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