MONOPOLY CAPITALI$M
How media and T-Mobile got the better of AT&T and Verizon
With the stock market in a deep funk (and getting funkier by the day) investors are looking for safe places to park their money, like stocks that pay healthy dividends. Which would be telecom stocks, right?
Maybe not.
The truth is that telecom stocks — there are really only three biggies these days; AT&T (T), Verizon (VZ) and T-Mobile (TMUS) — aren’t what they used to be. Some say that has to do with their disastrous forays into the world of media, but it’s probably more a matter of failed execution and the maturation of the business.
First the media math. Remember that within a two-week period in May of last year, both AT&T and Verizon jettisoned WarnerMedia and Yahoo, their respective content properties, (yes, the latter owns my employer, Yahoo Finance). These moves were made to rid the data-driven, left-brain telcos of frivolous, flowery — never mind costly — media businesses. Getting out of content, the thinking went, would allow the telephone companies’ distribution businesses to run full-out and unfettered, which would presumably be a boon to shareholders.
“My days are a little bit more predictable than they were a couple of years ago,” AT&T CEO John Stankey told Yahoo Finance's Brian Sozzi this week. “That's one of the reasons why we made the decision to do what we're doing. I didn't think I could do my best work or the broader management team could do their best work if we were trying to fight too many battles on too many different fronts. We are a more focused company today. We're executing each week better than we were the week before, but we still have room to go.”
For sure on that last point.
Since May 15, 2021, roughly when these announcements were made, Verizon’s stock is down 18% and AT&T is down 19%. The S&P is only off 4%. The stocks still underperform the market after factoring in their 6% plus dividend yields.
Perhaps that’s surprising given these companies made game-changing announcements — particularly in the case of AT&T, as its divestment of content was a much bigger move relative to the size of its overall business. It’s also surprising since both AT&T and Verizon stocks sport generous dividend yields, which ideally would bolster the shares during a market downturn.
Did deep-sixing the content businesses help the telcos’ stocks? No, it did not.
Before we get more into that, let’s first consider T-Mobile, once ridiculed (and still loathed) by the Big Two, for its over-the-top former CEO, John Legere, and its garish (yet effective) pink branding. Legere stepped down two years ago, but, guess what, T-Mobile is now ascendent if not triumphant. Barron’s recently pointed out that T-Mobile has a bigger market cap ($177 billion) than Verizon ($173 billion) or AT&T ($119 billion). True, both Verizon and AT&T are more leveraged, so that the overall enterprise value of the two older companies is bigger. But the fact remains that T-Mobile stock has trounced Verizon and AT&T — and the market — over the past five years.
Why is that? In a word, execution. T-Mobile merged with Sprint, priced aggressively to build market share, and most importantly, improved its network.
“TMUS 5g network is probably 18 months ahead of AT&T and Verizon's, if not a little more,” says Keith Snyder, an industry analyst at CFRA. “[AT&T’s and Verizon’s] balance sheets are bad. Those two companies combined have about $300 billion that they need to get off their balance sheet at some point. Meanwhile, they need to spend very heavily on network deployments and new spectrum.”
And another thing: “Verizon's stock price is lower than it was 20 years ago. AT&T's stock price is lower than it was 20 years ago,” says veteran industry analyst Craig Moffett. “Granted, they've paid dividends, but the total return by owning those stocks has been less than what you would have gotten from a corporate bond."
Someone’s made money here, though. As this 2017 McKinsey report points out, internet giants Amazon, Google and Facebook have built up massive businesses on the networks of AT&T and Verizon. The combined market caps of those three tech giants — $3 trillion — is 6.4 times that of the three telcos' $469 billion.
So did AT&T and Verizon blow it by not being able to marry content with distribution? Moffett thinks that’s a red herring.
“I'm not sure ‘the tug and sway between content and distribution’ has ever been a terribly relevant thesis,” Moffett says. “It's one of those things that people like to talk about, but it doesn't really have all that much real-world application. Partially the problem with trying to be vertically integrated is that the law frowns on it. So there's limitations on what you could do. You could theoretically make content exclusive and that sort of thing, but as carriers you generally aren't allowed to do that. So there isn't really any particular strategic logic for being vertically integrated.”
To Moffett it’s more a matter of two companies with declining businesses and bloated balance sheets that will struggle to pay their dividend down the road. AT&T already cut its dividend as part of its divestiture of the media business earlier this year.
As for the companies’ path forward: “They're not going to go bankrupt,” Snyder says. “They're established, their businesses are generating cash. It's just that they need to rethink what they're doing.” Moffett offers a more succinct prognosis: “It's terrible.”
On the other hand, both analysts are sanguine about T-Mobile, which they say will continue to grow at the incumbents’ expense.
Is there any optimism to be had AT&T or Verizon? “The bull case for Verizon or AT&T is that expectations are so low that the stocks have nowhere to go but up,” Moffett says. “And as long as they maintain the dividend, that thesis could perhaps work.” But then he adds: “The problem is, as we've seen so often with these companies, if they can't generate any growth, then the sustainability of the dividend eventually is in doubt.”
For Verizon and AT&T, it’s not a great position to be in. Turns out even big splashy media deals couldn't help them.
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