Investors have been wary of AT&T and Verizon Communications stock this year due to concerns over lead-cable contamination, wireless competition, and a slowdown in industry growth. These worries have raised questions about the sustainability of their dividends. This situation, however, presents an opportunity for bargain hunters, according to Citi analysts.
There is a chance that AT&T (T) and Verizon (VZ) could turn the tables if the costs of cleaning up lead-wrapped cables are lower than anticipated, and if the competition among wireless telecom providers stabilizes. This would address the concerns surrounding their dividend payouts, as both companies currently boast dividend yields close to 8%.
After careful analysis, Citi’s Michael Rollins upgraded his rating on Verizon to Buy from Neutral. He also increased his target price on Verizon’s stock to $40 from $39. In addition, Rollins upgraded AT&T to Buy, maintaining a target price of $17. However, he continues to assign a ‘High Risk’ rating to both companies.
As of early trading on Tuesday, Verizon shares were up 1.9% at $34.19, while AT&T shares saw a 2.5% increase to $14.57.
Although both companies have experienced declines this year—AT&T is down 23%, and Verizon has fallen 15% as of Monday’s close—the catalyst for this drop was a report from The Wall Street Journal in July. This report highlighted the existence of over 2,000 abandoned lead-encased telecom cables and raised concerns about potential health risks associated with them.
Despite this setback, Rollins believes that there are reasons to be hopeful about the recovery of both companies’ stocks.
Telcos Face Challenges but Remain Resilient
Market caps for Telcos with potential lead-wrapped cable exposure have dipped by $21 billion, which is close to the estimated $15 billion cost of remediation based on recent disclosures and our assessments, reports Rollins.
The declining stock prices of AT&T and Verizon, despite Wall Street analysts believing the initial reaction to the lead-sheathed cable story was exaggerated, indicate that other concerns are also contributing to the slump. Nevertheless, Rollins affirms that the wireless industry is in better shape than anticipated.
Rollins states, “The industry’s postpaid phone growth is surpassing our previous expectations as well as consensus estimates, which is quite surprising. Moreover, the business segment appears to be performing better than feared, with layoffs showing signs of stabilization.”
Furthermore, AT&T and Verizon have the potential to increase their free cash flow in the future by implementing pricing adjustments and cost-cutting measures, according to Rollins. These moves suggest a reduction in aggressive price competition between the two companies.
Rollins confirms that “improved forward free cash flow should…help decrease net debt and bolster dividend payouts.”