As the Dow Rises, Are Verizon and AT&T Doomed to Underperform?

The Dow Jones Industrials (DJINDICES: ^DJI  ) finished Wednesday with modest gains of almost 50 points, managing to claw back a bit less than half of its triple-digit losses from Tuesday. Even amid uncertainty about the health of U.S. economic growth and ongoing fears about rising valuations for the stock market, the Dow has nevertheless kept moving higher without anything more than the smallest of dips along the way. Yet once again on Wednesday, the Dow's telecom giants failed to keep up with the average's gains, with Verizon Communications (NYSE: VZ  ) falling short with just a quarter-percent gain and with AT&T (NYSE: T  ) actually having lost ground. The question more investors are asking now is what's holding the two Dow telecoms back and whether they'll ever be able to catch up to bigger gains from the Dow over the past year.

^DJI Chart

Dow data by YCharts

From a fundamental standpoint, Verizon and AT&T are doing quite well currently, but they're facing some uncertainty in their future prospects. With dramatic expansions to their respective wireless networks, both AT&T and Verizon have captured big customer bases from which to reap profits. Moreover, both companies are working hard at expansion efforts aimed at taking more business away from cable companies, with Verizon's FiOS offering a broadband-Internet alternative while AT&T tries to complete its merger with a key player in the satellite television arena in order to bolster its menu of offerings to its customers.

Still, the rise of smaller competitors in the wireless arena could pressure profit margins in the long run. Already, AT&T has responded aggressively to competitors' attempts to undercut its prices by making reductions of its own, and reports in the coming earnings season will have vital information on how successful defensive efforts from both Dow telecoms have been. Without success in preventing massive customer defections to lower-cost alternatives, Verizon and AT&T might have to make more price cuts in the future, and that in turn could lead to a downward spiral in a price war that could crush the entire industry.

Yet perhaps most importantly, many investors don't view AT&T or Verizon as growth stocks, and therefore don't accord them the same participation in broader gains in the Dow Jones Industrials than their Dow peers. Dividend investors love the Dow's telecoms for their high dividend yields, and it's more important to them for the companies to sustain their solid business models rather than making big bets on expansion plans. Combined with the threat of rising bond yields that could hurt dividend stocks, AT&T and Verizon's collective underperformance fits into context better.

The Dow Jones Industrials will eventually pull back, and when that happens, the big question will be whether Verizon and AT&T hold up better than their fellow Dow components. For now, though, shareholders will have to content themselves with the healthy dividend payments they're getting -- and the hope that AT&T and Verizon will find ways to preserve their competitive advantages.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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9/1/2015 4:35 PM
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