AT&T and Verizon Gain as Dow Falls 200 Points

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.

3 stocks that can help you retire rich
If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

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: 2806929, ~/Articles/ArticleHandler.aspx, 9/16/2014 11:57:36 AM

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...


Advertisement