{"id":38129,"date":"2023-07-20T08:28:13","date_gmt":"2023-07-20T12:28:13","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/verizon-and-att-inc-the-toxic-lead-cables\/"},"modified":"2023-07-20T08:28:15","modified_gmt":"2023-07-20T12:28:15","slug":"verizon-and-att-inc-the-toxic-lead-cables","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=38129","title":{"rendered":"Verizon And AT&T Inc: The Toxic Lead Cables"},"content":{"rendered":"
\n

How low can deep value stocks go? If you own AT&T Inc<\/strong> (T) and\/or Verizon Communications<\/strong>
\n VZ
\n <\/fbs-ticker> (VZ), you\u2019re no doubt (and quite understandably) asking that question.<\/p>\n

A week ahead of its July 25 Q2 results and guidance call, Verizon sells for less than 7 times expected next 12 months earnings. AT&T shares are even cheaper at 5.6 times, in advance of releasing its numbers on July 26.<\/p>\n

Those are levels of valuation only seen for blue chip stocks at the bottom of major bear markets. And neither company has come close to its current P\/E since breaking off from the old Ma Bell in 1984, including following the tech\/telecom meltdown of 2000-02.<\/p>\n

Both companies also now yield well north of 8 percent, heights generally reserved for endangered dividends. That\u2019s as much as Verizon yielded back in the mid-1980s when it still traded as Bell Atlantic.<\/p>\n

For AT&T, it\u2019s the highest yield since 2021, just prior to the Warner Brothers<\/strong> (WBD) spinoff and a corresponding -46.6 percent dividend cut. But neither giant telecommunications company\u2019s current guidance shows any danger of a payout reduction.<\/p>\n

<\/fbs-ad><\/p>\n

AT&T management in late June, for example, affirmed its “on track to hit $16 billion free cash flow or better” in 2023. That would leave more than $8 billion after are dividends paid, enough to retire all maturing debt this year and more than half of what\u2019s coming due in 2024.<\/p>\n

Verizon\u2019s current guidance is $17 billion free cash flow this year, or $6 billion plus after dividends. That\u2019s enough to retire all debt maturing through 2024, plus half its remaining floating rate debt.<\/p>\n

Neither are credit ratings under the kind of pressure that would force a cut. Verizon draws ratings of BBB+ from S&P<\/strong>, Baa1 from Moody\u2019s<\/strong> and A- from Fitch<\/strong>, and all three raters assess its outlook as “stable.” AT&T\u2019s equivalent ratings are BBB, Baa2 and BBB+, respectively, also with stable outlooks.<\/p>\n

Both companies\u2019 wireless and broadband franchises will be under investors\u2019 microscopes next week for signs of deterioration in subscriber numbers, revenue and operating margins. And despite already low valuations, meaningful declines will almost surely send stocks sinking even further.<\/p>\n

That\u2019s arguably an even bigger risk for the remaining small to mid-sized U.S. communications network companies\u2014such as Lumen Technologies<\/strong>
\n LUMN
\n <\/fbs-ticker> (LUMN) and Frontier Communications<\/strong> (FYBR), which are already down by 69 and 52 percent year to date respectively. These companies are already dealing with accelerating revenue declines. And with CAPEX budgets a fraction of sector giants, they have no real hope of keeping up on network quality.<\/p>\n

AT&T and Verizon are beneficiaries of their demise. Instead, their big summer declines are due to more existential issues.<\/strong><\/p>\n

Back in June, rumors surfaced that Amazon
\n
\n AMZN
\n <\/fbs-ticker>.com<\/strong> (AMZN) was exploring selling discounted wireless service through its hugely popular Amazon Prime marketing channel. This hasn\u2019t yet materialized. But rumors continue to swirl the tech giant will make a cut-rate bid for 5G spectrum-rich DISH Network<\/strong>
\n DISH
\n <\/fbs-ticker> (DISH).<\/p>\n

With DISH shares down more than -50 percent this year, its market capitalization has shrunk to less than $3.6 billion. And with $64 plus billion of cash on its balance sheet, Amazon would presumably have little problem also absorbing the currently distressed $21.25 billion of debt, as well as the tens of billions more needed to convert spectrum into a competitive network.<\/p>\n

The real question is whether such a deal would make sense for Amazon, given the cost and current robust competition in the sector between the Big 3 of AT&T, Verizon and T-Mobile U.S.<\/strong> (TMUS). Also, as I pointed out in the July Conrad\u2019s Utility Investor<\/strong> feature article, cable television providers Comcast
\n
\n CMCSA
\n <\/fbs-ticker> Corp<\/strong> (CMCSA) and Charter Communications<\/strong>
\n CHTR
\n <\/fbs-ticker> (CHTR) are already offering discounted service renting Verizon\u2019s network under MVNO agreements.<\/p>\n

Nonetheless, the Amazon rumor is sure to be on investors\u2019 minds as these companies report, including T-Mobile on July 27. And now there\u2019s another story overhanging AT&T and Verizon, as well as every other U.S. company that owns copper communications wires.<\/p>\n

The Wall Street Journal<\/strong> has published a study alleging decades-old phone company cables cased in “toxic” lead present serious health and environmental risks, including to workers who installed and serviced them. WSJ further implies telecom companies knew about the dangers for some time and are potentially liable for hundreds of billions of dollars in future lawsuits. And Bloomberg Intelligence<\/strong>estimates a “cleanup” could cost $43 billion.<\/p>\n

Those are big numbers. So it\u2019s little surprise the WSJ article would convince more than a few investors to throw in the towel, especially since these stocks were already chronic underperformers.<\/p>\n

My view: The past week\u2019s sellers may come to regret it. First, these stocks are already historically cheap, <\/strong>which means investor expectations are also historically low and easy to beat. Second, barring something extraordinary in Q2 results and guidance, there\u2019s no immediate risk to dividends.<\/strong><\/p>\n

Third, absent some major new revelation, these stocks are pricing in a worst case that\u2019s still highly unlikely.<\/strong> AT&T released a statement that less than 10 percent of its copper-wire network has lead-encased cables, with a “very small portion” running underwater.<\/p>\n

Much smaller rural service provider Telephone & Data Systems<\/strong> (TDS) estimates just 10 miles of its cables are lead covered. And while Verizon, Lumen and others are still compiling information, it\u2019s likely their networks are similar.<\/p>\n

Fourth, making the case lead cables are dangerous and should be removed is one thing. But finding companies guilty of knowing they were a threat and willfully endangered the public is orders of magnitude more difficult.<\/strong><\/p>\n

Just ask the frustrated trial lawyers now suing oil producers for “causing” global warming. And these cables have been an essential piece of the American communications network for over a century, with their presence well known to industry and environmental regulators.<\/p>\n

When the WSJ article broke, one prominent analyst commented, “investors are likely to shoot first and ask questions later,” meaning bail out before the facts are fully known. That\u2019s clearly happened here. But equally, if lead cables don\u2019t cause the sector apocalypse some are predicting, current share prices are ultimately going to look ridiculously low.<\/p>\n

Really loading up on a falling stock violates the cardinal rule of prudent portfolio risk management. But there\u2019s reason enough to stick around with Verizon and even weaker AT&T\u2014at least until they tell their side of the story with Q2 results and guidance calls. That\u2019s what I intend to do.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

How low can deep value stocks go? If you own AT&T Inc (T) and\/or Verizon Communications VZ (VZ), you\u2019re no doubt (and quite understandably) asking that question. A week ahead of its July 25 Q2 results and guidance call, Verizon sells for less than 7 times expected next 12 months earnings. AT&T shares are even […]<\/p>\n","protected":false},"author":1,"featured_media":38130,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-38129","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nVerizon And AT&T Inc: The Toxic Lead Cables | iFintechWorld<\/title>\n<meta name=\"description\" content=\"How low can deep value stocks go? 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