Suddenly The Boat Is Getting Rocky For AT&T

| About: AT&T Inc. (T)
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After a strong rally this year, AT&T (NYSE:T), along with wireless duopoly cohort Verizon (NYSE:VZ), suddenly faces some serious threats to its competitive advantage. In a low interest rate environment, investors have continued to chase the yield on AT&T, pushing the dividend down to 4.7% while competitors are in the process of launching an attack.

As highlighted in this article last week, the huge gains in the domestic cable and wireless stocks have gotten ahead of reality. Those gains were partially based on an environment of limited competition. This could dramatically shift with the rumors of a Sprint (NYSE:S) investment by SoftBank and the pending merger of T-Mobile (OTCQX:DTEGY) and MetroPCS (PCS). Suddenly, the weak domestic wireless providers have become a threat to the cushy life of the duopoly.

Not to mention, the news gets even worse for AT&T, as Verizon continues to capture market share with a more advanced 4G network.

Sprint Investment

As outlined last week, the last thing Sprint needed was more competition via the T-Mobile push to be a viable 4th competitor in the market. Well, the same applies to AT&T, especially as the stock sits at four-year highs.

The rumored deal according to Bloomberg involves SoftBank investing up to $19B in Sprint via buying out existing equity and purchasing new equity at around $6.50. As part of the deal, Sprint might buy Clearwire (CLWR) or MetroPCS with some of the proceeds to obtain much-needed spectrum. With Sprint already owning 48% of Clearwire, it seems questionable that it would offer a substantial valuation to control the rest of the company.

With Sprint becoming a very viable competitor with this serious investment, AT&T could be the big loser. While both parties confirmed the talks, no guarantee exists that the deal will be concluded. With SoftBank plunging on the Nikkei, it could change the direction of the deal. Large investors might place pressure on Softbank management to stop the deal from moving forward.

Verizon 4G Lead

On Tuesday, Verizon announced the expected launch of the 400th 4G LTE market on October 18th, two months ahead of schedule. In fact, the company expects to launch 21 new markets bringing the total to 417.

Conversely, AT&T only expects to hit 100 markets by the end of 2012. This disparity in network coverage should contribute to market share loss until the company can catch up.

The below chart provided by Verizon highlights the differences in the 4G city coverage by the 4 wireless networks:

*Note the chart is not updated for any recent launches.

Stock Price

The stock was trading around $27 last year making it very extended on the recent move to $38. After a six-day selloff, the stock is short-term oversold at $36. Investors should expect a bounce that probably should be sold.

1 Year Chart - AT&T


Holding a stock that has soared 40% in the last year is dangerous when competition heats up. Not only is AT&T facing increased competition from the two competitors left for dead, but also its main rival is now the clear leader with the most advanced network.

Investors looking for yield should look elsewhere. A 4.8% dividend yield is the lowest level in years. Not to mention, AT&T has a significant debt load of over $60B that questions whether the company should even pay a dividend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please consult your financial advisor before making any investment decisions.