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By: Martin Tillier
The stock of the two big telecommunications companies, Verizon (VZ) and AT&T (T) has had a tough time recently. Both are down significantly from highs earlier in the year; 12.5% in VZ’s case and a 13.35% drop for AT&T. Regular readers of my column, Market Musings, will know that I have a contrarian side to me, and am always on the lookout for stock that is oversold. Both Verizon and AT&T may well fit that bill at current levels.
The drop started when talk of tapering QE came from the Fed Chairman, Ben Bernanke. The possibility this presented of rising interest rates put pressure on the price of anything that was seen as a dividend play, and telecom stocks fit that description. One of the things that 20 years in dealing rooms taught me, however, is that once a narrative takes hold amongst traders, everything is seen as reinforcing that view. Thus, Q2 earnings releases from both companies were interpreted as adding fuel to the fire, when, in reality, the results weren’t that bad. Had sentiment been different it is possible that the market would have focused on the positives in the reports and the same releases would have been deemed decent results.
VZ beat on the bottom line, admittedly by only $0.01 at $0.73 vs $0.72, and basically matched revenue expectations at $28.6 Billion and the stock fell slightly on the day. T released more conventionally disappointing numbers, posting a drop in profit of 2.1% compared to last year, but on increased revenues. They also added a decent number of subscribers, so the news was not all bad, but the stock fell all the same.
Both T and VZ looked a little overbought earlier this year as dividend stocks continued to be all the range, but in both cases the sell-off is looking a little overdone. It should be understood that QE hasn’t actually ended, nor will it in the near future. The Fed is merely considering a gradual reduction and has still pledged to maintain an ultra-low interest rate policy for the foreseeable future. Given that, I don’t expect rates to rise much more in the near future.
To rate these companies a buy, you have to subscribe to that view, as higher interest rates constitute a double whammy. Not only is the relative value of the dividends decreased, but also, due to the highly leveraged nature of the business, interest expense rises significantly as rates climb.
If you don’t see a bloodbath in bonds, then dividend returns of 5.3% for AT&T and 4.3% for Verizon still look attractive in this environment. Once the prevailing negative sentiment moderates it is reasonable to assume that buyers will re-emerge.
I believe that the negative sentiment surrounding T and VZ will change soon. I have said before that traders, like talk show hosts, are professional over reactors and that fact looks to be in play here. The initial move started for a reason, but momentum has built to the point of being overdone. T-Mobile has been making some inroads into the big two mobile providers, but they still represent solid businesses that, owing to the continued development of mobile devices, have the ability to continue to grow.
Over the long term, an investment that gives close to a 5% yield with the prospect of growth is too good an opportunity to miss. I don’t think the price of either stock is about to explode, but splitting an investment between them at these levels would be a good idea for the more conservative part of a portfolio. The dividends give some cushion should the market’s correction continue, and any product upgrades by Apple (AAPL) or other device manufacturers could well spark a significant rally.