Fed Fever Sends the Dow Soaring, but Why Did AT&T and Verizon Fall Today?

The Dow Jones Industrials (DJINDICES: ^DJI  ) surged 181 points on Wednesday, breaking out of its funk as the Federal Reserve reiterated its generally accommodative position on interest rates. After March's meeting, investors had feared that the Fed would be quick to push rates higher starting sometime next year, but the release of the minutes from that meeting today painted a different picture. Still, even big gains for the Dow Jones Industrials weren't enough to prevent telecom stocks AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) from losing ground Wednesday.

At first glance, good news on the economic front should be positive for the wireless industry. Both Verizon and AT&T have continued to make large investments in their respective networks, with Verizon just earlier this week making a deal to acquire the wireless assets of a major regional carrier, which includes valuable spectrum that Verizon can use to make further enhancements. AT&T has so much invested in wireless that it will change its advertising slogan to "mobilizing your world," emphasizing the future direction of the telecom industry even as it tries to phase out landlines and other antiquated technology. If low interest rates spur more economic growth, then Verizon and AT&T should benefit.

But competition has played a key role in holding Verizon and AT&T back. Today, T-Mobile announced a new $40 plan with 500 megabytes of data and unlimited talk and text that doesn't include any automatic overage fees. Rather than simply charging people when they go over their limit, the new plan will measure data use and prompt users to make additional payments if they want to boost the amount of data they use in any given month. Moves like this have forced AT&T and Verizon to follow suit, and the net impact could be falling profit margins throughout the industry.

Another competitive threat could come from the cable industry. As consolidation hits that industry hard, cable operators will do battle with traditional telecoms to an even greater extent, with package deals that encroach on each other's territory. Verizon and AT&T could stand to win as much as they lose from the fight, but success is far from assured on that front.

The wildcard for AT&T and Verizon is whether they make moves to expand internationally. With Verizon having made its big takeover of its wireless segment and with AT&T having decided to make a big repurchase of up to 300 million shares, it seems less likely that they'll take on an acquisition to expand globally. In the long run, though, international expansion might be essential if the companies want to grow further.

Investors are shunning AT&T and Verizon despite their high dividend yields because of uncertain about their future growth prospects. But if the industry reaches a new competitive equilibrium rather than flaring out in a cutthroat price war, then Verizon and AT&T both stand to do quite well in the long run.

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  • Report this Comment On April 10, 2014, at 4:51 AM, FloridaJo wrote:

    In Shanghai, one of the biggest buildings in the financial district is the Chinese phone company. If they could break into China that would be huge upside potential.

  • Report this Comment On April 10, 2014, at 10:23 AM, smalls6262 wrote:

    "AT&T having decided to make a big repurchase of up to 300 million shares, it seems less likely that they'll take on an acquisition to expand globally. In the long run, though, international expansion might be essential if the companies want to grow further."

    Do you realize those shares bought and placed into their treasury holdings could be used in a cash [bond financed cash] and STOCK offer? Take a hard look at the treasury holdings beginning mid 2012 keeping in mind T reportedly approached VZ early 2013 with the proposal of a joint VOD takeover. Treasury holdings prior to mid 2012 had been flat for 4 years. IF anything, the accumulation of treasury stock holdings may signal they are building a holding of shares to be used in M&A. The last information I could find places T with the third highest holding of treasury share value behind IBM and PG.

    With the large capital outlays in T's pursuit of U.S. fiber build, there is only one good reason why they would be buying shares to be held in treasury instead of infrastructure. JMO, a large M&A move is on the horizon. Six month restriction in place means T can't bid for VOD until late July unless VOD's board of directors invites a bid from T. There is another angle around takeover restriction but the UK takeover panel would have to agree there has been a material change...VZ sale closed cutting market cap ~40% and antitrust issue is gone as VOD gave the VZ shares received in a deal to the VOD SHAREHOLDERS. However, it appears T is still in the process of building its treasury shares which could be used in a bid. T will have in the neighborhood of 60B in treasury shares which could be used in a bid IF the recent additional authorization plus outstanding are fully purchased. 60B in treasury stock that can be used in a cash and STOCK bid. Time will tell.

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