It has been three decades since Business Week proclaimed “The Death of Equities” on its cover. That 1979 obituary for the stock market, published when the Dow Jones industrial average languished at a mere 875, became a symbol of an age of doubt. So shattered were ordinary Americans by gas lines, recessions and double-digit inflation that they resorted to pulling cash out of equity mutual funds — for eight straight years.
Investors in the ’70s were stunned by an alarming rise in volatility. The comfortable, ordered system of international exchange, in place since the Bretton Woods accord at the end of World War II, had come apart, leading to violent fluctuations in currency values. Grain shortages sent food prices soaring, and memorably, OPEC put the squeeze on oil. The cumulative effect was a loss of faith in money itself. (Doomsayers urged redeploying assets into metals, oils — anything other than paper.) Inflation, a virulent form of instability, terrified investors, who duly stayed on the sidelines.
It may seem strange to be drawing parallels to the ’70s now — prices are so stable that the fear is of deflation. Yet there is no mistaking the ’70s-ish gloom that has overtaken Wall Street. The trauma of the financial crisis has yet to be dispelled. It is not just Lehman Brothers and Bear Stearns that have disappeared but an ethos of confidence in long-term investing.
Though stocks remain well above 2009 lows, investors are withdrawing money from U.S. equity funds for the third straight year. Dispiritingly, investors are shunning attractively priced stocks in favor of bonds (both government and corporate) on which the returns are anemic.
The current crisis was inspired by financial shocks rather than commodity disruptions. But the result is a familiar malaise. The international monetary system, hobbled by imbalances and deficits, seems broken. Another echo is the sense that the sheer number of economic problems precludes a solution to any one of them. In 1979, an investment analyst was heard to despair, “The future is clouded by many ugly questions.” Today analysts despair over high unemployment, failing mortgages, government deficits, impotent political responses, a weakening economy and a similar litany abroad. In another echo, Chicken Little has staged a comeback. In the early ’80s, an energy consultant forecast — in this magazine — a “high probability” of an oil shock in which “the basic legitimacy of our political system might be called into question.” Today’s version is hyping the possibility of a stock-market crash. Albert Edwards, an investment strategist for the French bank Société Générale, has said he expects a “bloody, deep recession” that produces a stock-market collapse of at least 60 percent. He recently drew a crowd of 600.
Of course, any such forecast could prove right. But it is generally more lucrative to sell prophecies of doom than to act on them. What the herd tends to overlook is that stocks are not — except perhaps in the very short term — a bet on the odds of an apocalypse, nor are investors in securities rewarded for their prowess as macroeconomists. The real challenge of investing is so prosaic it is often forgot. Stocks are simply a claim on future corporate earnings: if you can buy those claims at a discount, you should do well.
Wise men will disagree on the meaning of “at a discount.” But American business is profitable even today. And the Standard & Poor’s 500 stock index is trading at only 12 times the expected earnings of the underlying stocks over the next year. Inverting that ratio, stocks have an earnings yield of 8.5 percent. (Each $100 of stocks is backed by $8.50 of expected earnings.)
Compare that with Treasury bonds, on which the yield is a dismal 2.58 percent. Short-term bond rates are well under 1 percent. The gap between 8.5 percent and 2.58 percent represents a striking reversal. For most of the past generation, bonds yielded more, sometimes much more, than stocks. The theory was that since earnings would grow over time, investors in stocks would accept a lesser return at the outset. They would pay for growth.
Now investors are flocking to bond funds; they are paying to avoid uncertainty — to avoid the prospect of financial Armageddon. Americans whose attitudes toward investing were shaped by bibles like “Stocks for the Long Run” seem to have undergone a fundamental rewiring. Perhaps when you are out of a job, the long run doesn’t matter. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”
In markets, of course, gloom is no more permanent than boundless optimism. For the previous generation, the turn arrived in 1982 — three years after “The Death of Equities.” It was fueled by corporate raiders, who could not resist seeming bargains on Wall Street and whose takeover bids sent share prices soaring.
There is no telling how long the present funk will last, but there are signs it could end in similar fashion. Corporations in droves have been exploiting low interest rates by borrowing. I.B.M. raised $1.5 billion at a record-low interest rate of 1 percent. It used a chunk of its haul to acquire a software vendor. Borrow cheap and buy low.
So far, ordinary consumers remain too in hock or too frightened to do either. What money they have is going into bond funds. “The individual investor is saying no más to equities,” notes Robert Barbera, the chief economist for Mount Lucas, a private investment firm. It is hardly a stretch to say that the recovery of companies like I.B.M. is being fueled by the willingness of small investors to lend to them on the cheap.
Most of the people buying bond funds do not use a calculator in making investment decisions. They are captives, understandably, of their experience. But gloom and doom also has its price. It would be a sad twist if people were to mirror their recent excessive risk-taking with excessive caution now.
Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer and the author of “The End of Wall Street.”
Aug. 16 (Bloomberg) — Investors are moving more money than ever before out of stocks and into bonds, widening a valuation gap and convincing JPMorgan Chase & Co. and BlackRock Inc. that now is the time to buy equities.
About $33 billion flowed out of funds owning U.S. shares this year even as the economic recovery sent free cash flow for American companies excluding banks to 6.8 percent of their market value. That’s the highest level compared with corporate debt yields since 1960, Credit Suisse Group AG data show. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute.
The biggest money managers say concern the U.S. will slip into a recession is overblown and that individuals piling into fixed-income securities for their relative safety are making a mistake. David Kelly, who helps oversee $445 billion as chief market strategist for JPMorgan Funds, says record low yields show there’s too much demand for bonds and aren’t a sign the economy is headed for the second recession in three years.
“People would rather overpay for bonds than underpay for stocks,” Kelly said in an interview from New York. “It’s a reflection of an extraordinary prejudice. If people are at an emotional extreme, it means that at some point there’s got to be reallocation of cash away from the bond market toward the stock market. Ultimately, it’s bullish.”
Weekly Decline
The Standard & Poor’s 500 Index fell as much as 0.9 percent today and gained 0.3 percent before ending with a less than 0.1 percent advance to 1,079.38 at 4 p.m. New York time.
Stocks dropped last week, with the S&P 500 losing 3.8 percent to 1,079.25, on speculation the global economic recovery is faltering. Investment-grade corporate bonds returned 0.54 percent, including reinvested interest, according to Bank of America Merrill Lynch’s U.S. Corporate Master index. A four- month rally in Treasuries has pushed yields on 10-year notes down to 2.57 percent, compared with 4.01 percent on April 5, data compiled by Bloomberg show.
The Federal Reserve on Aug. 10 reversed plans to exit from monetary stimulus and said it would keep its bond holdings level to support an economic recovery, which it said is weaker than anticipated. Cisco Systems Inc., the world’s largest maker of networking equipment, forecast sales on Aug. 11 that missed analysts’ estimates, while unemployment claims rose in a Labor Department report on Aug. 12.
Yanking Funds
Investors have pulled money from U.S. equity funds in 10 of 17 months since the start of a rally in March 2009 that sent the S&P 500 up as much as 80 percent. This year’s withdrawal, the biggest since 2008, came as worker firings and reduced capital spending pushed company cash to $836.8 billion, according to S&P. Non-financial companies are yielding 0.8 percentage point more in free cash flow than the average interest rate on investment-grade corporate bonds, according to Credit Suisse.
About $185.3 billion was invested in bond funds in 2010 through July 31, according to ICI. That’s the most for the first seven months of any year since 1984, when ICI started compiling the data. The spending has helped push the average investment- grade bond price to more than 110 cents on the dollar, the highest level in more than six years, Bank of America Merrill Lynch index data show.
“Stocks are a screaming buy relative to bonds,” said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, which oversees $342 billion. “The valuation divergence makes sense if a deflationary abyss is coming. If the economy improves, the gap will look silly.”
Earnings Growth
Earnings for S&P 500 companies may rise 36 percent in 2010 and 16 percent in 2011, the largest two-year advance since the period ended in 1995, according to the average analyst projections in Bloomberg data. Economists predict a 3 percent expansion in U.S. gross domestic product this year, the fastest since 2005, Bloomberg data show.
A moderate recovery combined with attractive valuations mean Philip Morris International Inc. and EMC Corp. are cheap enough to buy, said Keith Wirtz, the chief investment officer of Fifth Third Asset Management Inc. in Cincinnati.
“Some of these equity investments are providing earnings yields that are extremely competitive relative to the bond market,” said Wirtz, who oversees $18 billion. “Given the uncertainties of 2011 on the macro picture, investors will look for returns in the large and quality segment of the market.”
Cash From Operations
Philip Morris trades at 14 times reported earnings, below its record ratio of 17.6 in 2008, Bloomberg data show. The New York-based company generated $3.68 a share in free cash flow, or cash from operations left over after capital expenditures, during the past year, giving a yield of 7.1 percent. Analysts estimate earnings at the world’s largest publicly traded tobacco seller, which raised its full-year profit forecast last month, to rise 15 percent this year and 10 percent in 2011.
EMC, the world’s biggest maker of storage computers, said last month that second-quarter profit more than doubled as businesses in the U.S. and Europe boosted spending on information technology. Its free cash flow yield is 7.7 percent, according to data compiled by Bloomberg. Hopkinton, Massachusetts-based EMC trades at 23.8 times earnings, down from 35.8 in 2007.
The S&P 500 trades at 14.4 times annual earnings, compared with an average of 16.5, according to data compiled by Bloomberg that goes back to 1954. Normalized earnings-per-share growth and price-to-earnings ratios for the gauge over the next 10 years will match their median rates since 1957, said Robert C. Doll, vice chairman at BlackRock, which oversees $3.2 trillion.
10 Predictions
Doll, in an Aug. 2 statement called “10 Predictions for the Next 10 Years,” forecast that U.S. stocks will return 8.1 percent a year including dividends and the S&P 500 will almost double to 2,034 by the decade’s end. He also said that returns in stocks will likely outpace U.S. Treasuries and cash.
“We’ll have enough earnings growth coupled with valuations,” Doll, chief equity strategist at the New York- based firm, said in an interview. “That’s an environment where stocks outperform. If the world is anything close to normal, stocks are more interesting than bonds.”
While bond valuations are rising, investors are buying. The top 10 lowest-yielding U.S. corporate new issues in history have been sold in the last 14 months as yields on 2- and 3-year Treasuries fell to record lows, Deutsche Bank AG strategist Jim Reid wrote in an Aug. 4 note.
IBM, J&J Sales
International Business Machines Corp., the world’s biggest computer-services company, raised $1.5 billion on Aug. 2 at the lowest interest rate on record. The 1 percent, 3-year IBM notes have the lowest coupon of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. Johnson & Johnson sold $1.1 billion of bonds on Aug. 12 at the lowest interest rates on record for 10-year and 30-year securities.
The valuation gap between bonds and stocks may widen further on investor concern about deflation, said Mohamed A. El- Erian, chief executive officer of Newport Beach, California- based Pacific Investment Management Co., which runs the world’s biggest bond fund.
“A small increase in the probability of a deflation can have a material impact on markets even if the overall probability of the scenario remains low,” El-Erian wrote in an e-mail. “The greater the concern with deflation, the higher the vulnerability of the lower parts of the capital structure for both companies and economies. The risk premium in markets goes up disproportionately.”
Options Insurance
The Chicago Board Options Exchange Volatility Index, derived from prices investors pay to protect against losses in the S&P 500, jumped to 26.24 on Aug. 13, the highest level in a month, as global stocks slumped. The VIX remains down from this year’s closing high of 45.79 on May 20.
“Investors have not recovered from the trauma of the financial crisis,” said Howard Ward, fund manager at Gamco Investors Inc., which oversees $26 billion in Rye, New York. “This would lead you to buying bonds, at what is likely a dangerous inflection point looking beyond the next six months, assuming no double-dip. It takes a real believer in the rewards of equity investing to commit funds in this stormy environment.”
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.
While Research in Motion has been busy all week trying to defuse a rapidly accelerating international controversy over its encryption codes that sent shares tumbling, the Waterloo-based tech giant found some time on Tuesday to launch its long-awaited response to Apple Inc.‘s iPhone 4: the BlackBerry Torch 9800.
Reaction has been decidedly mixed for the new slider smartphone, but for Gus Papageorgiou, analyst with Scotia Capital, the BlackBerry Torch is RIM’s Best. Phone. Ever.
“We believe this is the best BlackBerry ever released. With strong carrier support, a new App World and new developer tools, we believe the BlackBerry Torch will be a strong seller worldwide,” Mr. Papageorgiou said in a note to clients.
After handling the phone, Mr. Papageorgiou gushed about its solid look and feel, which while similar to the Palm Pre is considered a “superior” experience.
“We were very much impressed with how RIM incorporated touch into the interface and allowed for significant functionality from the home page, while maintaining the popular keypad shortcuts that its current subscriber base has become accustomed to,” he said.
Mr. Papageorgiou also liked the phone’s social feeds app, which consolidates access to Facebook, Twitter, LinkedIn, and other buzzy social media hotspots.
However, he acknowledged that there is a “lack of a showcase feature or stellar hardware” which may create headwinds for the Torch.
“We fear pundits will not appreciate the productivity enhancements made in this OS and will instead focus on the device’s technological shortcomings,” he said.”Although the Torch’s lacklustre hardware specification will likely prove to be problematic in gaining the blogging community’s support, we believe AT&T’s strong promotion … and RIM’s dedication to improving app development will drive strong device sales.”
Of course, whether this phone is any good and whether it is good enough to combat the iPhone are two separate questions.
It looks like RIM has that covered as well, with AT&T exclusively offering the phone at the moment and about to roll out an extensive promotional campaign.
“The Torch will be positioned as its flagship messaging devices, whereas the iPhone is positioned as a media consumption device given its integration with iTunes,” he said. “When asked about iPhone adoption amongst enterprise, AT&T commented how large enterprises were not adopting the iPhone due to the lack of native device management and because of the significant installed base of BlackBerry Enterprise Server. We believe RIM has a strong defensible position in the enterprise space and will make inroads to the consumer segment with its new media-focused platform.”
Mr. Papageorgiou recommends investors buy into RIM before it takes off, arguing the stock is trading at an undervalued 8.2x price/earnings ratio. He rates RIM a Sector Outperform with a price target of $117.
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(Bloomberg) — Canadian stocks rose to complete their best year in three decades, led by oil producers and financial companies, after unemployment claims fell to a 17- month low in the U.S.
Cenovus Energy Inc., the oil spinoff from EnCana Corp., added 1.9 percent as oil climbed to a six-week high of $80 a barrel on signs of an accelerating economy. Toronto-Dominion Bank, Canada’s second-largest lender, rose 0.9 percent. Suncor Energy Inc., the country’s largest oil and gas company, fell 0.9 percent as U.S. natural-gas inventories fell less than estimated.
“Jobless claims was a little better than expected,” said Blair Falconer, a portfolio manager at HSBC Securities (Canada) Inc., which manages about C$16 billion ($15.3 billion). “That gave us a little pop.”
The Standard & Poor’s/TSX Composite Index added 28.65 points, or 0.2 percent, to 11,746.11. The benchmark index for Canadian stocks jumped 31 percent this year and posted its biggest annual advance since 1979. The gauge beat the S&P 500 for the sixth straight year, boosted by commodity-linked companies that make up 46 percent of Canadian stocks by market value. Metals and oil have surged in 2009 on signs of recovering economic growth.
“It’s been a really quiet week but a really great year,” Falconer said.
For the decade, the S&P/TSX increased 40 percent while the S&P 500 lost 24 percent, excluding dividends.
Western Canada
The U.S. Labor Department reported new unemployment claims fell 22,000 to 432,000 last month, reaching the lowest level since July 2008. Most economists in a Bloomberg survey forecast jobless claims would increase.
Crude oil gained for a seventh day, rising as high as $80 a barrel in New York, a six week high.
Cenovus, which produces oil in Western Canada, rallied 1.9 percent to C$26.50. Canadian Oil Sands Trust, part owner of the country’s Syncrude project, climbed 1.4 percent to C$29.91.
Energy companies with a greater interest in natural-gas projects fell after a U.S. government report showed that inventories fell less than analysts estimated last week.
Suncor, which bought Petro-Canada in August, declined 0.9 percent to C$37.21. Provident Energy Trust, which produces oil and gas in Western Canada, slipped 1.7 percent to C$7.08.
Most lenders rose on the U.S. economic news. TD Bank, which has 1,045 branches in the U.S., gained 0.9 percent to C$65.96 to contribute the most to the S&P/TSX’s gain. Royal Bank of Canada, Canada’s largest bank, added 0.5 percent to C$56.40.
Teck Resources Ltd., Canada’s largest base-metals producer, declined for a fifth session, falling 2.5 percent to C$36.82. Copper futures dropped more than 1 percent from their intraday high in afternoon trading in New York.
INVESTORS SHOULD PUT AT&T BACK ON THEIR SPEED-DIAL LISTS.
This phone giant doesn’t deserve to be on Wall Street’s “Do Not Call” list. The country’s No. 2 cellular phone-service provider’s shares (ticker: T) are down 8% this year, while the Dow Jones Industrial Average — made up of AT&T and 29 other blue-chip stocks — is up 17% over the same period. The broader Standard & Poor’s 500 index, to use another comparison, has gained a whopping 21%.
Apple’s iPhone helped AT&T add a record two-million subscribers during the third quarter.
“Since March, the market has been enamored with leverage and low quality,” says Charlie Smith, chief investment officer of the value-oriented large-cap mutual fund Fort Pitt Capital Total Return (FPCGX), with $31.2 million in assets, including top holding AT&T, at 4.66%. “Stable companies haven’t performed well,” says Smith.
In AT&T’s case, the woeful share performance is also attributable to the approaching end of its exclusive contract to sell Apple’s (AAPL) wildly popular iPhone, says Mike McCormack, telecom analyst at JPMorgan. Although the terms of their deal are confidential, it’s widely assumed that it will wind up toward the end of 2010. The loss of that exclusivity could have a “meaningful” impact on AT&T’s subscriber base, he says.
Yes, it could. But AT&T’s weak share price overlooks a number of positives — including robust cash flow, a 6.3% dividend yield, a broad line of other smartphones and a management team, headed by CEO Randall Stephenson, that has proved it can cut costs, reduce debt and integrate acquisitions. For many of the same reasons, some analysts also recommend buying AT&T debt.
“The loss of exclusivity in 2010 is already priced into the stock,” says Sergey Dluzhevskiy, telecom analyst at Gabelli & Co. However, there’ll be some headline risk when the actual event occurs. AT&T enjoyed a 2.2% gain in average revenue per wireless user in the third quarter, and had a record low churn, or customer-loss rate, of 1.43% in the same period, he notes. Dluzhevskiy believes the stock, at 26.11 last Thursday, is worth 34, based on 2009 results. At recent levels, the stock has a price/earnings ratio of just 12 times estimated 2010 earnings. Gabelli & Co. has a Buy on the shares.
THE KEY BENEFIT OF THE iPhone contract has been in “getting people into the store and [helping] sell other smartphones” for AT&T Wireless, says Todd Rosenbluth, an analyst at Standard & Poor’s Equity Research, which has a Strong Buy rating on AT&T and a 12-month price target of 31. “It helped to boost and invigorate its customer base,” as 60% of iPhone sales and subscriptions went to existing AT&T customers, he says.
These advantages are unlikely to disappear completely, even if the contract expires next year.
“We’ve got a good relationship with Apple,” declares Rick Lindner, chief financial officer at AT&T. “At some point in the future, if Apple wants other U.S. carriers to sell the iPhone, we expect we’d continue to sell a full line of Apple products,” he says. And “we have a very robust line of devices, including higher-end, integrated devices,” Lindner adds.
Aside from the iPhone, AT&T is the leading service provider for BlackBerry, and offers a variety of smartphones including hotties like HTC Pure, Samsung Impression and LG Vu, among others.
AT&T added a record 2 million wireless subscribers in the third quarter, the third time in the last five quarters it’s approached that number, embarrassing bearish Wall Streeters who warned of flattening demand. In all, AT&T has 82 million wireless customers, behind No. 1 Verizon Communications’ (VZ) 89 million.
THE CENTURY-OLD FORMER phone monopoly is expected to earn $2.12 a share this year on revenues of $123 billion, and $2.25 a share on revenues of $124 billion in 2010. In addition to its increasingly important wireless business, which kicks in 46% of cash flow and 39% of revenue, the global company offers communications services in the personal-computer and video markets for both consumers and businesses.
By comparison, rival Verizon owns only 55% of its cellular joint venture with Vodafone Group (VOD). That means it gets a commensurate amount of profit from the venture. Overall, Verizon is expected to generate a profit of $2.46 per share this year, on revenues of $108 billion, and $2.50 a share next year, on revenues of $109 billion.
AT&T continues to bleed traditional wireline phone revenue. Its revenue from the traditional service was down 7.1% in the third quarter, and it has undergone extensive cost cutting in that area. But the business portion should pick up as the economy recovers, says Lindner. AT&T also faces brutal competition from cable companies, including Comcast (CMCSA) and Time Warner Cable (TWC), which offer attractively priced bundles of video, voice and broadband to consumers. AT&T’s consumer land-line business, considered by many a dinosaur, dropped 11% in the third quarter.
In an attempt to fend off the cable companies, AT&T delivers its own television service through its “U-Verse” Internet-powered TV offering, as well as partners with DirecTV Group (DTV) to offer satellite TV service. AT&T also has something the cable companies don’t- mobile telephone service.
AT&T’s free cash flow for the first nine months of this year totaled $13.9 billion, more than for all of 2008, despite the tough economy, and that free cash flow has many anticipating a mid-single-digit hike in the $1.64 dividend to be announced in December, when the board is scheduled to meet.
“Historically, we’ve increased the dividend for the last 25 years, in good economic times and challenging ones,” says CFO Lindner.
At 6.3%, AT&T’s dividend yield is fatter than that of its bonds, which some analysts also find attractive. One issue, due in 2019 and rated single-A by Moody’s and S&P but with negative outlooks, recently traded at a yield premium of 1.4 percentage points over 10-year Treasuries, or 4.8%. That’s about in line with similarly-rated Verizon’s 10-year bonds.
By comparison, the 10-year bonds of consumer-products giant General Mills (GIS), whose creditworthiness is rated a couple of notches lower, recently traded at 1.3 percentage points over Treasuries.
David Novosel, senior analyst at corporate-credit research firm Gimme Credit, says AT&T is a “slightly improving credit,” and he has an Outperform rating on the bond issue. Novosel notes that management has reduced debt by $1.9 billion in the first three quarters of this year. Debt now stands at a reasonable 1.7 times Ebitda, or earnings before interest, taxes, depreciation and amortization. Total net debt minus cash at the end of the third quarter was $66.5 billion, down 9% from $73 billion at the end of 2008.
Management has promised to get debt down to 1.5 times Ebitda before contemplating a resumption of stock buybacks, which have been virtually nil since the second quarter of 2008. The 1.7 level is already lower than rivals’ — like France Telecom (FTE), at 2.4 times, and Deutsche Telekom (DT), at 2.9 times — although it lags Verizon’s 1.3 times.
Novosel believes AT&T will achieve its debt-reduction goal in the second or third quarter next year. “They’re doing what they say they’re going to do, and that’s generated some trust” among bondholders, he says.
Lindner says the company is serious about keeping its single-A credit ratings. As part of its belt-tightening, AT&T cut its capital expenditures this year by 15%, to roughly $17 billion from about $20 billion in 2008 — and plans to keep them in a stable range over the next 12 to 18 months.
AS THE HOLIDAYS APPROACH, the fierce competition for consumer attention will intensify. There’s been buzz about iPhone rivals like Droid at Verizon, the Palm Pixi at Sprint Nextel (S) and Project Black at T-Mobile, which is owned by Deutsche Telekom.
AT&T is planning “a big splash on Black Friday,” the big retailing extravaganza the day after Thanksgiving, “to promote relatively new offerings,” says S&P’s Rosenbluth. AT&T has “an interesting and compelling broadband story” to tell, he says.
The Bottom Line
Although they’ve lagged the market, AT&T shares — with a 6.3% dividend — look attractive, regardless of the fate of its Apple deal. What’s more, AT&T debt merits consideration.
That may help ease some of the embarrassment over last week’s setback in a lawsuit against Verizon over ads that portray AT&T’s third-generation, or 3G, coverage as meager compared to Verizon’s — a criticism even AT&T’s admirers concede has merit. A judge ruled that Verizon did not have to take the ads off the air during the lawsuit.
“You’ll find the bottlenecks in the networks in [Los Angeles], San Francisco and New York City,” says Smith of Fort Pitt Capital. “They need more towers, and they’re getting them,” he says.
AT&T’s goal is to have a much stronger network in place before the iPhone exclusivity contract expires.
For investors, a marketing blitz and additional cell towers are nice, but still not as nice a gift as a solid hike in AT&T’s dividend.
Nov. 9 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said a rebound in stocks is “re-liquifying” the U.S. economy and housing prices are showing early indications of ending their decline.
“We have been very fortunate that the stock markets moved back” and are “re-liquifying the whole process,” Greenspan said at an event in Edmonton, Alberta, presented by Abu Dhabi National Energy Co., the state-controlled energy producer known as Taqa.
The Standard & Poor’s 500 Index advanced 2.2 percent to 1,093.08, a sixth straight day of gains, and is up 62 percent from its low for the year on March 9. The Dow Jones Industrial Average added 203.52 points, or 2 percent, to 10,226.94, the highest close in 13 months.
The world’s largest economy is feeling the “maximum impact” now from the federal government’s $787 billion in fiscal stimulus, Greenspan said. He said a rebound in house prices might help avert another wave of foreclosures.
“It may be too soon, but all the relevant price indexes are turning,” Greenspan, 83, said. “Now whether or not that is temporary is very difficult to tell, because we have never been through anything like this.”
A gauge of home prices in 20 U.S. cities rose in August for a third consecutive month. The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said Oct. 27.
Greenspan was appointed Fed chairman in 1987 by then- President Ronald Reagan and served until January 2006. He was succeeded by Ben S. Bernanke.
U.S. Growth
In the third quarter, gross domestic product expanded at a 3.5 percent annual rate after a yearlong contraction, Commerce Department figures showed Oct. 29. Household purchases increased 3.4 percent, the most in two years.
Greenspan said inventories are being drawn down as the economy recovers. Manufacturers will need to rev up production lines to prevent stockpiles from being depleted, he said.
“An ever-increasing part of your consumption must be met by industrial production,” rather than from inventories, he said, adding that this phase may extend into the second quarter of 2010. After that, the economic outlook “is going to depend to a very significant extent on what stock prices do.”
Through stocks comes a “wealth effect” from realized capital gains, he said.
Job Losses
U.S. payrolls fell last month more than the median forecast of economists surveyed by Bloomberg News, and the unemployment rate jumped to a 26-year high of 10.2 percent, according to a government report last week. The figures bolstered expectations the Fed is more likely to maintain its pledge to keep interest rates near zero.
The economy has lost 7.3 million jobs since the recession began in December 2007, the biggest drop since the Great Depression.
U.K. Chancellor of the Exchequer Alistair Darling, hosting a meeting of finance ministers from Group of 20 nations, said on Nov. 7 his colleagues decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold.
Greenspan said the U.S. needs to address the country’s budget deficit.
“Our capacity to sell U.S. Treasury issues was never in doubt because we had a very significant cushion between federal debt on the one hand and the capacity to borrow on the other.”
With budget shortfalls projected, “that cushion is narrowing,” he said. “We are in a position where we have got to reign in” the national debt.
DIVIDEND INCREASES THIS YEAR BY AT&T and Verizon would be a corporate vote of confidence in the resiliency of the telecom-services industry. That’s what Morgan Stanley telecom analysts Simon Flannery and Daniel Gaviria said in an Aug. 27 research report. The duo was on record for expecting Verizon (ticker: VZ) to sweeten its payout this month by around 3%, compared with a consensus guess of about 4.5%. They think AT&T (T) will increase its quarterly by a similar amount in December, which is in line with the consensus.
They are already right on Verizon.
Thursday, the company voted a 3.3% payout enrichment, to 47.5 cents a share, from 46 cents. Disbursement is scheduled for Nov. 2 to stockholders of record Oct. 9. The ex-dividend date is Oct. 7. This is the third consecutive year that Verizon has raised its disbursement, and the move will put an extra $43 million in investors’ pockets quarterly.
“This increase reflects the strength of our cash flow and balance sheet,” said Verizon chief executive Ivan G. Seidenberg. “It demonstrates the board’s commitment to return cash to our shareholders while continuing to invest in the long-term growth of our business.” Verizon was formerly known as Bell Atlantic, and is the biggest wireless company, followed by AT&T, which is still the exclusive U.S. carrier for Apple’s iPhone.
Flannery and Gaviria say their optimism on the Big Two “comes despite investor concerns about wireless wars and secular and cyclical wireline pressures, and underscores the strong free-cash-flow generation and modest leverage the companies enjoy.” They rate the telecom-services industry Attractive, largely because they believe that Bell dividends are not only sustainable but will probably continue climbing.
The two analysts also point out that AT&T and Verizon enjoy A-rated balance sheets, strong cash-flow generation and revenue stability. Their average yield of 6% compares very favorably to 10-year Treasury yields of 3.4%, and their own corporate-bond yields, and they rank first and second, respectively, on dividend yield in the Dow 30. “We believe investors will start to become more confident in returning to high-yielding equities as they become more comfortable in dividend sustainability.”
Another plus for Verizon, say Flannery and Gaviria, is that it expects to generate $500 million to $600 million in synergies over the next few years from its January acquisition of Alltel, “which should support earnings and cash-flow growth.”
Verizon’s net cash from operations in this year’s first half surged almost 12% from a year ago, to $14.14 billion. With capital expenditures totaling $8.1 billion in January-June, free cash flow was $6 billion, up $1.8 billion from a year earlier.
Recently quoted at 30 and change, the stock’s 52-week range is 36.01 to 23.07. Standard & Poor’s rates it Buy.
The present AT&T, which was formed in 2005, is made up of the original AT&T and the former SBC Communications and BellSouth Baby Bells. The company has enriched its quarterly common payout every year since SBC’s formation in 1984. In the June quarter, cash from operations amounted to $7.9 billion, capital expenditures came in at $4 billion and dividends totalled $2.4 billion.
AT&T was recently priced at 25 and change, and has ranged between 33.10 and 20.90 over the past year. S&P’s investment opinion is Strong Buy.
Additionally, Flannery and Gaviria observe that Canada’s BCE (BCE), which recently increased its payout by 5% in a surprise midyear announcement, “could raise the dividend again later this year.” Ditto Canadian peers Rogers Communications (RCI) and Telus (TU), they opine.
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