How media and T-Cellular acquired the higher of AT&T and Verizon



With the inventory market in a deep funk (and getting funkier by the day) buyers are searching for protected locations to park their cash, like shares that pay wholesome dividends. Which might be telecom shares, proper?

Perhaps not.

The reality is that telecom shares — there are actually solely three biggies today; AT&T (T), Verizon (VZ) and T-Cellular (TMUS) — aren’t what they was. Some say that has to do with their disastrous forays into the world of media, nevertheless it’s most likely extra a matter of failed execution and the maturation of the enterprise.

First the media math. Do not forget that inside a two-week interval in Might of final 12 months, each AT&T and Verizon jettisoned WarnerMedia and Yahoo, their respective content material properties, (sure, the latter owns my employer, Yahoo Finance). These strikes had been made to rid the data-driven, left-brain telcos of frivolous, flowery — by no means thoughts expensive — media companies. Getting out of content material, the pondering went, would permit the phone corporations’ distribution companies to run full-out and unfettered, which might presumably be a boon to shareholders.

“My days are a little bit bit extra predictable than they had been a few years in the past,” AT&T CEO John Stankey told Yahoo Finance’s Brian Sozzi this week. “That is one of many the reason why we made the choice to do what we’re doing. I did not assume I may do my greatest work or the broader administration crew may do their greatest work if we had been attempting to struggle too many battles on too many alternative fronts. We’re a extra centered firm as we speak. We’re executing every week higher than we had been the week earlier than, however we nonetheless have room to go.”

BURBANK, CALIFORNIA - OCTOBER 29: John Stankey, President & Chief Operating Officer of AT&T and Chief Executive Officer of WarnerMedia, speaks onstage at HBO Max WarnerMedia Investor Day Presentation at Warner Bros. Studios on October 29, 2019 in Burbank, California. (Photo by Presley Ann/Getty Images for WarnerMedia)

John Stankey speaks onstage at HBO Max WarnerMedia Investor Day Presentation at Warner Bros. Studios on October 29, 2019 in Burbank, California. (Picture by Presley Ann/Getty Photographs for WarnerMedia)

For certain on that final level.

Since Might 15, 2021, roughly when these bulletins had been made, Verizon’s inventory is down 18% and AT&T is down 19%. The S&P is just off 4%. The shares nonetheless underperform the market after factoring of their 6% plus dividend yields.

Maybe that’s stunning given these corporations made game-changing bulletins — notably within the case of AT&T, as its divestment of content material was a a lot larger transfer relative to the dimensions of its general enterprise. It’s additionally stunning since each AT&T and Verizon shares sport beneficiant dividend yields, which ideally would bolster the shares throughout a market downturn.

Did deep-sixing the content material companies assist the telcos’ shares? No, it didn’t.

Earlier than we get extra into that, let’s first take into account T-Cellular, as soon as ridiculed (and nonetheless loathed) by the Massive Two, for its over-the-top former CEO, John Legere, and its garish (but efficient) pink branding. Legere stepped down two years in the past, however, guess what, T-Cellular is now ascendent if not triumphant. Barron’s recently pointed out that T-Cellular has a much bigger market cap ($177 billion) than Verizon ($173 billion) or AT&T ($119 billion). True, each Verizon and AT&T are extra leveraged, in order that the general enterprise worth of the 2 older corporations is larger. However the reality stays that T-Cellular inventory has trounced Verizon and AT&T — and the market — over the previous 5 years.

T-Mobile US Inc Chief Executive Officer John Legere arrives at Manhattan Federal Court during the T-Mobile/Sprint federal case in New York, U.S., December12, 2019.  REUTERS/Shannon Stapleton

John Legere arrives at Manhattan Federal Courtroom in the course of the T-Cellular/Dash federal case in New York, U.S., December12, 2019. REUTERS/Shannon Stapleton

Why is that? In a phrase, execution. T-Cellular merged with Dash, priced aggressively to construct market share, and most significantly, improved its community.

“TMUS 5g community might be 18 months forward of AT&T and Verizon’s, if not a little bit extra,” says Keith Snyder, an business analyst at CFRA. “[AT&T’s and Verizon’s] stability sheets are unhealthy. These two corporations mixed have about $300 billion that they should get off their stability sheet sooner or later. In the meantime, they should spend very closely on community deployments and new spectrum.”

And one other factor: “Verizon’s inventory value is decrease than it was 20 years in the past. AT&T’s inventory value is decrease than it was 20 years in the past,” says veteran business analyst Craig Moffett. “Granted, they’ve paid dividends, however the complete return by proudly owning these shares has been lower than what you’ll have gotten from a company bond.”

Somebody’s made cash right here, although. As this 2017 McKinsey report factors out, web giants Amazon, Google and Fb have constructed up huge companies on the networks of AT&T and Verizon. The mixed market caps of these three tech giants — $3 trillion — is 6.4 instances that of the three telcos’ $469 billion.

So did AT&T and Verizon blow it by not having the ability to marry content material with distribution? Moffett thinks that’s a crimson herring.

“I am unsure ‘the tug and sway between content material and distribution’ has ever been a really related thesis,” Moffett says. “It is a type of issues that individuals like to speak about, nevertheless it would not actually have all that a lot real-world software. Partially the issue with attempting to be vertically built-in is that the legislation frowns on it. So there’s limitations on what you can do. You might theoretically make content material unique and that form of factor, however as carriers you typically aren’t allowed to try this. So there is not actually any explicit strategic logic for being vertically built-in.”

To Moffett it’s extra a matter of two corporations with declining companies and bloated stability sheets that may battle to pay their dividend down the highway. AT&T already reduce its dividend as a part of its divestiture of the media enterprise earlier this 12 months.

As for the businesses’ path ahead: “They are not going to go bankrupt,” Snyder says. “They’re established, their companies are producing money. It is simply that they should rethink what they’re doing.” Moffett provides a extra succinct prognosis: “It is horrible.”

Then again, each analysts are sanguine about T-Cellular, which they are saying will proceed to develop on the incumbents’ expense.

Is there any optimism available AT&T or Verizon? “The bull case for Verizon or AT&T is that expectations are so low that the shares have nowhere to go however up,” Moffett says. “And so long as they keep the dividend, that thesis may maybe work.” However then he provides: “The issue is, as we have seen so usually with these corporations, if they cannot generate any development, then the sustainability of the dividend ultimately is doubtful.”

For Verizon and AT&T, it’s not an amazing place to be in. Seems even huge splashy media offers could not assist them.

This text was featured in a Saturday version of the Morning Transient on Saturday, September 17. Get the Morning Transient despatched on to your inbox each Monday to Friday by 6:30 a.m. ET. Subscribe

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