Telecom service providers have not been having a good time on the bourses the last few weeks, and the recent guidelines on net neutrality from the FCC is certainly not making things better for them. AT&T Inc. (T, Financial) has lost close to 10% since the beginning of February and in an update for first quarter trends issued last week, the company sees increased pressure on revenues and margins in the short term but nevertheless reiterates its full-year guidance. Later this week, the company will also be replaced by Apple Inc (AAPL, Financial) in the Dow Jones Industrial Average. Many analysts, such as those at Wells Fargo (WFC, Financial) are putting out a “BUY” rating on AT&T.
New net neutrality rules
Following a legal challenge from Verizon Communications Inc. (VZ, Financial) last year, the Federal Communications Commission released new detailed rules governing broadband services that bring telecom players under its ambit as well. This has brought some measure of relief, at least temporarily, for AT&T which will now continue to throttle its unlimited data plan for the foreseeable future, till such time as the FCC intervenes. This will keep operational costs lower than they would have been, had the Federal Trade Commission had its way in its case against the company. However, the new net neutrality rules have impacted telecom and broadband stocks negatively, and the AT&T stock has lost close to 4% this month alone.
Earnings and guidance update
According to AT&T’s 8-K filing last week, the company expects service revenues to be impacted by the continued strong adoption of Mobile Share Value plans. The margins for the first quarter are expected to be lower, compared to the first quarter of 2014 but as the year proceeds, AT&T says its annual wireless service margins will expand on a YoY basis. It expects similar pressure on margins in the first quarter from its wireline business, as well as from paying approximately US$130 million to almost 3,000 employees seeking voluntary retirements. But in the following quarters of 2015, these pressures are expected to be offset by continued product revenue growth and additional cost savings. Consequently, AT&T reiterated its full-year standalone guidance for 2015. This has led to analysts putting a “BUY” rating on the stock.
Removal from Dow Jones Industrial Average
From March 19, Apple will replace AT&T in the Dow Jones Industrial Average. As an index with only 30 companies on it, as opposed to the S&P 500 index which has 500 companies, the Dow is not considered a very reliable indicator of the markets by many investors. So this move should not have much impact, positive or negative, on the stock. However, there are various funds that track the Dow and will sell AT&T once it is out of the index and buy Apple instead. That sell-off may lead to a brief price decline in the stock price, and will make for a good entry point to purchase this stock.
Dividend yield
According to an analyst at Seeking Alpha, the stock is trading on par with industry averages from various fundamental perspectives, but looks very attractive when one looks at dividend yield. Its dividend yield of 5.67% is far higher than the technology industry average of 3.27% and that also makes this a very attractive stock to buy.
