Telecoms Decline As The Market Climbs

The major indexes rallied over the last six sessions, approaching twelve month highs established in September. This was bolstered by the first government to raise interest rates in over a year - the Australian Central Bank, and Alcoa, the traditional first Dow component to report earnings, beating analysts expectations by sixteen cents.

The Telecoms did not participate in the week long rally - why? On Wednesday, AT&T surprised the industry by announcing that they will allow Apple’s iPhone to carry VOIP (Voice Over Internet) applications, such as Skype, over AT&T’s 3G Network. This was applauded by analysts and financial journalists, but the public reacted adversely, dragging down the sector each day since the announcement was made. The investor knee-jerk reaction was due to the concern that long distance earnings will suffer, because customers will use Skype to make overseas calls for free, avoiding the regular per minute charge that is a lucrative source of income.

The same kind of reaction occurred when AT&T decided to subsidize the purchase of the iPhone, resulting in an upfront hit to their revenue stream. This strategy and the opening up of voice Internet applications on their network are both designed to meet customer demands and more importantly, as a long term goal, attract new subscribers. After all, you cannot use the iPhone in this country, unless you sign up to AT&T, and you will not be able to use Skype on your cell phone for international calls, unless you become a subscriber as well. Currently, Verizon and the other Telecoms are not offering this service, so AT&T has a jump on the competition. It is even rumored that AT&T may partner with Google in the near future, to further solidify integrating Internet applications with wireless phones.

Although there is stiff competition and declining revenues in the wire-line area, the major Telecoms have been consistently performing well through the recession. Last quarter, AT&T earned $3.2 Billion, with total revenues of $30.7 Billion. Verizon earned $3.1 Billion with revenues of 26 Billion. Not many companies can make such a claim during these tough times. They are basically cash cows with many sources of income and increasing wireless bases, both consistently paying dividends, with current yields over 6%. Try getting a return like that at your local bank!

Earnings season is upon us and AT&T will be reporting on October 21 - Verizon on October 26. We will be watching closely to see if they can continue their successful track records.

DISCLOSURE: Charlie Cohn owns shares of AT&T and Verizon common stock.

Click Here for Telecom Earning (Oct. '09)

C. Cohn