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Pat Racaniello
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I have been writing for THE MONEYPAPER since 1987 as its portfolio editor and stock analyst. In additional I have been a “fee only” money manager for a select group of investors operating through Multivest Corporation, a company I set up in 1985. My investment objectives are to put my... More
  • Could AT&T and/or Verizon Be Contemplating A Voluntary Split?

     

      In the good old days it was competition for the consumer dollar that set prices. Companies had to make prices attractive for consumers to buy their goods and/or services, if not consumers would go elsewhere. Healthy competition from many companies large and small insured that that was the case. When companies grew too big they became monopolies. It then became governments’ task to step in and break them up. The most recent and classic example was the antitrust case that resulted in the breakup of AT&T. The Bell System was at that time the largest company in the world, and it handled both local and long distance telephone services. The US government felt that for real competition to prevail local and long-distance had to be separated. After the breakup competition in long-distance service benefited the consumer enormously. Interstate and international calls originating in the US dropped from 62¢/minute in 1983 to 10¢ in 2001. The breakup worked adequately for almost 30 years as the long-distance industry thrived and consumers benefited. However, over the years the Baby Bell companies and GTE, (a very large independent), gradually were reassembled into what we have today 2 dominate players; AT&T and Verizon.

       Over the years the marketplace has changed, and we now have Wireless and wired phone lines with a trend for consumers to switch to wireless from land lines. Landlines seem to be going the way of telegraph. Today over half of AT&T and Verizon revenues come from their wireless operations. Now AT&T wants to buy Deutsche Telekom’s T-Mobile for some $39 billion. It would be nice for those T-Mobile customers to be paying an American company.

      The U.S. Government has already entered a legal challenge to the deal with a trial scheduled to begin next Feb. 13. It is estimated the trial will take about a month.  Sprint Nextel, a distant 3rd in US wireless, wanted to stop the AT&T takeover of T-Mobile so much so that it went to court at its own expense, but the Judge refused to hear Sprints arguments. Sprint said it feared the merger would transform the market into a duopoly consisting of only AT&T and Verizon. Sprint was probably right.

    Regardless of the case’s outcome, America is perhaps only 1 or 2 deals away from seeing telecommunication giants with power not seen since before the breakup of Ma Bell. This is where we find ourselves today. AT&T and Verizon will soon have the power to control prices to consumers but also exercise an unfair advantage over their competitors. As I see it one of two things can happen.

    1.    Our government could breakup both AT&T and VZ. This would be the 2012 equivalent of the local/long-distance breakup of 1984. Except maybe this time, a breakup would last longer. A divestiture involving 2 companies is a huge step never before taken. However, many feel that if T-Mobile is taken over, then some sort of regulation would soon follow. After all it is the governments’ job to protect the public from a dominant duopoly.

    2.    The other possibility is that one or both could voluntarily split themselves. There seems a lot of this going around lately, evidenced by the upcoming splits of Abbott Labs, Sara Lee, Kraft, etc. This possibility is more likely as it gives AT&T and VZ more control of their future direction without a great deal of government intervention.

       Being a holder of both I keep a sharp eye on them. The real earnings driver for both has been wireless. The most logical breakup scenario, as I see it, would be to separate wireless as one stand alone company, with another company servicing Internet and television subscribers.

      A look at the numbers: both AT&T and VZ, over the past 10 years have seen no significant price movement up or down. The draw for investors has been the high yield. Usually, dividend investors don’t see wild price swings in utility-type companies, since earnings volatility tends to be much less than found in other industries. A slow steady growth that closely tracks earnings and dividends is what should be the norm. And at AT&T, that's what shareholders have received. AT&T’s overall dividend record performed better, posting 27 years of annual increases, and moved from an annual $1.02/share in 2001 to the current $1.72. AT&T has historically announced dividend increases in the 4th Q and paid a higher rate with the January payout.

      VZ’s dividend was stuck at $1.54 for 7 years from 1998 thru 2004. It rose to $1.62 in 2005 and 2006, and in 2007 it went to $1.65 and has steadily risen to the current rate of $2/share beginning with its December 2011 payout. Not much dividend growth at VZ, but both have maintained nice high yields. Although VZ has been slower at raising dividends its yield has been acceptable.

      So what are shareholders of AT&T and VZ to do? If this T-Mobile deal falls through then everything is moot. If approved we must wait and see if there are any corporate abuses that could require government intervention. As I said, the more likely outcome could be a voluntarily split. Either way investors may possibly end up with more than one dividend paying company. Investors looking for portfolio diversification should consider both AT&T and VZ, as diversification has proven over the years to reduce risk. I for one am sitting tight. 

    Nov 23 11:50 AM | Link | 1 Comment
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