Are AT&T and Verizon Holding Back the Dow Jones Industrials?

The Dow managed a modest gain in early trading Thursday, but its two telecom giants were down slightly.

May 29, 2014 at 11:30AM

The Dow Jones Industrials (DJINDICES:^DJI) were up 16 points as of 11:30 a.m. EDT, as market participants grapple with conflicting readings on the economy and on stock market sentiment. Even as the 5-year-old bull market roars ahead, some investors are starting to take defensive investing stances. Weak growth and falling interest rates might ordinarily help dividend giants AT&T (NYSE:T) and Verizon (NYSE:VZ), but both stocks were down slightly this morning, reflecting some of the industry-specific issues aimed at the two Dow components.


Source: Verizon.

For Verizon, which fell about 0.1% this morning, one primary challenge continues to be integrating the Verizon Wireless division into its overall corporate structure. This morning, Verizon announced that it would make an exchange offer for outstanding debt of Verizon Wireless, offering to exchange about $1 billion in British-pound-denominated notes for a similar amount of new notes issued directly by Verizon Communications. The benefits for Verizon include a simpler capital structure and a six-year extension on the maturity date for the debt. Given the huge debt load that Verizon assumed in making the Verizon Wireless acquisition in the first place, maintaining capital discipline and taking maximum advantage of the favorable interest rate environment will be essential for the company to sustain income and cash flow rather than falling prey to higher interest payments if rates rise in the future.


Source: AT&T.

Meanwhile, AT&T is navigating the active merger and acquisition environment on a number of fronts. Its planned acquisition of DIRECTV opens the door to a large number of video subscribers, which could help AT&T in its efforts to cross-sell television along with its broadband Internet and voice options. At the same time, AT&T has partnerships with companies that are acquisition targets from other buyers. For instance, AT&T said today that it anticipates no change in its relationship with Beats Electronics even after Apple announced yesterday it intended to buy the headphone maker and music streamer. Indeed, AT&T and its partners both rely on cooperative deals in order to bolster traffic and stay up to date with the latest trends in entertainment and technology.

In the past, many investors looked at Dow telecom stocks as a stable and quiet corner of the market. But with so much at stake in fighting for revenue from Internet, video, and phone services against a wider variety of companies from multiple industries, Verizon and AT&T have greater growth opportunities but also bigger challenges than they did in the past. Until both companies figure out how to build on their strategies to keep rising competition down, AT&T and Verizon might well weigh down any gains for the Dow Jones Industrials.

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