The sell-off in telecom stocks spurred by reports of lead-sheathed cables installed in phone networks likely will continue to pressure shares in AT&T (T) and Verizon Communications (VZ), say Wall Street analysts. T stock, VZ stock as well as Lumen Technologies (LUMN) and Frontier (FYBR) already lost a combined $18 billion in market value last week.
A buying opportunity, or just the first part of a decline on the way to major dividend cuts? The dividend for both T and VZ currently yield 8.11%
Most of the lead-sheathed cables were installed in phone networks before the 1960s. Making areas safer could cost tens of billions of dollars, analysts say.
"We could see what amounts to a general telecom buyer's strike for some time," SVB MoffettNathanson analyst Craig Moffett said in a note to clients Monday. Telecom stocks could be in the doghouse for a while, even if T stock and VZ stock offer attractive dividends, Moffett said.
"Investors are likely to shoot first and ask questions later," he added. "After all, none of these are stocks with outsized growth stories."
On the stock market today, T stock dipped 1.7% to 14.25. VZ stock fell a fraction to 33.96. LUMN stock rose 1.6% to 1.88. FYBR stock fell 2.2% to 13.99. Lead-Sheathing Issue Could Last Decades
Last week, The Wall Street Journal reported telecom companies installed potentially dangerous lead-covered cables overhead on poles, in soil and underwater. They will likely need to take steps to make areas environmentally safe, the Journal said.
As a result, JP Morgan downgraded AT&T on Friday to a neutral rating amid concerns. Meanwhile, Citigroup also downgraded AT&T Monday to neutral from buy due to the lead-sheathing issue.
At TD Cowen, analyst Gregory Williams said in his note to clients: "We see a considerable overhang for the foreseeable future."
Williams went on to say telecom stocks will be better off if pro-business Republicans are elected in the 2024 election.
"The range of outcomes could range from near-zero liability to billions of dollars in damages," he said. "We very much expect a long, drawn-out process, (with) self-auditing. Also, plenty of political squabbling with potential class action lawsuits and (attorney general) lawsuits. On the bull side, the level of contamination could be overstated. Or, the number of cables limited to very few."
Meanwhile, at Raymond James, analyst Frank Louthan said uncertainty for telecom stocks will linger.
"We can't begin to know how long this will take to get resolved, but it could be measured in decades, with other (Environmental Protection Agency) actions like the Lead Copper Rule as a potential guide," he said in a note. Telecom Stocks Not Growth Stories
Louthan went on to say: "Given this was within existing environmental regulations and risk of increased contamination is low, it is reasonable that the cost will be spread out over 10-plus years, minimizing the risks to the carriers."
VZ stock has retreated 13% in 2023. Further, T stock has plunged 21%. MoffettNathanson's Moffett said those two giants could see the most dollar exposure but may better absorb the shock.
"AT&T and Verizon likely have the greatest potential exposure in dollar terms, given the sizes of their wireline footprints. But wireline is also a proportionally smaller share of their businesses than it is of Lumen's and Frontier's," Moffett said. "Frontier, by virtue of primarily being a roll-up of incumbent phone company assets, may have the greatest proportionate exposure. The stock reactions over the past week generally align with these observations."
"One struggles to imagine the arguments that will now persuade incremental investors to step in," the telecom stocks analyst said. "Big picture, AT&T and Verizon were already facing challenges related to capital structure, cash flow generation, unit and revenue growth. Add lead to the list of reasons not to be excited about their stories."
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