U.S. Markets open in 2 hrs 38 mins

Why AT&T and Verizon Are Starting to Struggle

Dana Blankenhorn

The Time Warner acquisition made AT&T (NYSE:T) less of a phone company than Verizon Communications (NYSE:VZ) and more of an entertainment company. That is not its big problem.

Why AT&T and Verizon Are Starting to Struggle

Source: Shutterstock

This week, AT&T reported earnings of $4.1 billion, 56 cents per fully diluted share, on revenues of $44.8 billion. This included results from what AT&T now calls WarnerMedia, including HBO and CNN.

Verizon reported earnings of $5.16 billion, $1.22 per share, on revenues of $32.1 billion.  This included results from Verizon Media Group, the former AOL and Yahoo.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investors roundly booed both sets of numbers, which came up short of previous estimates, sending Verizon down 2% and AT&T down 3%. Both companies had claimed they would get synergies from their diversification efforts. That’s not happening.

AT&T Dividend Threat?

Analysts now see the 51-cent-per-share dividend at AT&T as severely threatened. Free cash flow of $5.9 billion for the quarter was below the $6.1 billion needed to keep the payout below 60% of earnings. The dividend currently yields 6.5%, but the stock is down about 7% from where it was a year ago.

AT&T insisted the WarnerMedia deal isn’t to blame for its problems. Its press release blamed a 544,000 loss of U-Verse cable television subscribers and an 83,000 loss of DirecTV satellite subscribers. Cord-cutting was behind the WarnerMedia buy, and that’s accelerating.

Wireless remains the AT&T cash cow, and the company did add 80,000 subscribers, while analysts had been forecasting a loss. But total revenue of the unit still missed estimates by $800 million, at $17.57 billion.

It’s the balance sheet that is worrying analysts, since the company took on a lot of debt to get WarnerMedia, over the objections of the Trump Administration. AT&T is just starting to pay that debt, selling non-core assets like its space at Hudson Yards in New York and its stake in Hulu, the streaming service, for a total of $3.6 billion. It hopes to cut $20 billion in debt this year, and layoffs are planned.

Verizon Cutting Losses

Verizon, meanwhile, is focusing on 5G services, having nearly written off the cost of Yahoo, which it once saw as increasing its online ad sales efforts. Instead of buying entertainment, it is partnering with Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube to attract streaming customers.

Verizon’s $4.3 billion of wireless investment brought it 61,000 new wireless subscribers during the quarter, with service revenues up 4.4%. Verizon’s dividend yields just 4% but is considered safer than AT&T’s.

Verizon has its own debt issues, having bought out minority partner Vodafone for $130 billion five years ago. But at least now it’s investing in a business it understands, and its market share in that segment is higher than AT&T’s.

The Big Problem

The big problem for both companies lies in their wired infrastructure, an enormous technology debt. This is their heritage from the old AT&T monopoly, broken up in the 1980s but then rebuilt, mostly in the form of today’s Verizon-AT&T duopoly.

Despite having moved to get out of wireline services a decade ago, Verizon is still being hurt, even after its FiOS fiber investments made it a broadband competitor.

AT&T has been trying to shut off its copper networks, saying no one uses them. The 2016 purchase of DirecTV was seen at the time helping it avoid upgrading those copper lines.

The Bottom Line

AT&T and Verizon have chosen different ways to pay off the 100 years of technology debt they inherited from the old Bell System.

Verizon is doing it with wireless, AT&T wants to do it by combining wireless and entertainment. But falling wireline customer counts are dragging both stocks down.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

More From InvestorPlace

Compare Brokers

The post Why AT&T and Verizon Are Starting to Struggle appeared first on InvestorPlace.