AT&T Becomes A Cigarette Stock

| About: AT&T Inc. (T)

When an industry is dying you get your inheritance early. Just don't pretend grandpa is immortal.

The classic example is the cigarette business. Some people love the cigarette business. They love the dividend, the yield. Pay no attention to that cancer behind the curtain, they say. Take the money.

The newspaper business went that way in the last decade. Fat yields. But we now know what those yields were hiding. The difference between corporate cancer and the kind people get is corporations can make people rich even while they're suffering, by offering yield.

And so we come to telecommunications.

To many AT&T (T) is the ultimate telecom, but it's actually the old regional Bell SBC, which bought Ameritech and Pacific Bell before taking the old long distance parent, and its name, in 2005. Later it swallowed BellSouth.

AT&T is basically a roll-up, a more successful version of the business Bernie Ebbers was trying to build before he went to jail. The difference was that Ed Whitacre did it all with real money, and honest accounting. But the goal was the same - to create monopoly positions and then fight regulators for fatter profits.

The cancer infecting AT&T is, ironically, Moore's Law. Better chips make it possible to run more-and-more data over less-and-less infrastructure. As a result the value of expensive new gear, its installation, training, service and maintenance, can't be recouped before the gear becomes worthless.

This became obvious years ago on the wired side. That's why AT&T's U-Verse system, which costs less but does less than Verizon's FiOS, makes more financial sense. Doesn't mean it can outrun the bear, but it can outrun the other guy running from the bear.

In this environment, AT&T's best move is to keep up the dividend (currently yielding 5.6%), sell assets (it just dumped the rest of its Yellow Pages operations on Cerberus for under $1 billion) and squeeze the workers (whether or not there's a strike there will certainly be givebacks).

Bulls here at Seeking Alpha like to point to wireless as the future of the company. But the same problem exists there. (Check out your 802.11n WiFi router at 100 mbps, then recall your 802.11b that ran at 10 mbps, if you don't believe me.) What costs under $100 for an in-home network costs billions for a national one, and by the time that money is spent the gear is nearly obsolete.

The only solution AT&T has found is to buy up rivals and create a duopoly with Verizon (VZ) Wireless, then try to squeeze more money from customers for the bits it delivers. Control over the bits was lost when the iPhone came out in 2007, and it's what you do with the bits that brings value, not their mere delivery.

So we have AT&T pretending to be cool, pretending to be entrepreneurial, but coming off like a 57 year old man in a disco. The comb-over doesn't work.

Not that there's anything wrong with that, if you're a dividend hunter. The question will be, as it is with all such stocks, just how long can how high a dividend be maintained before it all becomes obvious and the facade can no longer be maintained.

I have no clear-cut answer for that, save that in technology change happens suddenly and, when it does, there's no turning back, no turning away. AT&T may be a safe play for five years, even 10, but as with grandpa and the cigarettes, not forever.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.