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The Telecoms Are Listening

Posted: Jul 14, 2008 15:51 PM by Gregory S. Davis

Tickers in this Article: Q, S, T, VZ

The Senate approved a bill last week allowing major telecommunication carriers to avoid having to settle lawsuits stemming from the violation of consumer privacy. While the Senates decision is favorable for telecommunications companies the immediate impact on the carriers including Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and Qwest (NYSE:Q) is still unclear. Investors interested in telecommunications stocks should keep the ongoing dispute in mind but focus on the fundamentals.

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Legal Matter
The question is whether the government has the authority to ask corporations to implement unapproved surveillance in the name of national security. Following the 9/11 attacks telecommunications companies were asked to listen in on domestic telephone calls in order to capture or prevent future attacks. Despite the Senate's recent ruling, civil rights groups will continue to challenge the legality of the issue.

Bad News the Telecoms Don't Want You to (Over)hear
Qwest Communications and Sprint have been the hardest hit telecoms since the beginning of the year, dropping over 44%, and 36% respectively since the first day of trading in '08. Verizon and AT&T have done better, but both are still down 22% and 28% respectively and are lagging the performance of the S&P 500 which is down about 16% year to date. The growing wireless businesses of Verizon and AT&T in my opinion make them the two carriers to follow.

Verizon's Strength
At the end of the first quarter of 2008, Verizon's revenue increased by 5% to $23.8 billion pushing its operating margin up to 18% slightly above the 16% reported one year ago. (To learn more, read our related article Analyzing Operating Margins.)

Wireline revenue fell slightly, but domestic wireless increased 13%. Verizon's wireless revenue was driven by service revenue of $1.2 billion and a nearly 49% surge in data revenue to $767 million. Nearly 1.5 million net wireless customers signed on for Verizon's service for a total of 67.2 million customers at the end of quarter March 31. Data revenue was driven by increased text messaging, internet access, emailing and other data services. Verizon also repurchased $1.1 billion worth of stock during the first quarter making its remaining publicly traded shares more valuable while paying a dividend of 4.96%. (To discover the issues that complicate these payouts, read Dividend Facts You May Not Know.)

AT&T's Strength
AT&T's revenue also increased 6% to $30 billion for the first quarter. AT&T lost ground in voice revenues, buy its wireless segment increased nearly 17% to $10 billion. Its operating margin increased from 16% to 19.45% compared to the same period a year ago. AT&T also reported a 57% surge in data revenue due to increased usage of its advanced handsets. AT&T added five million new customers for a total of 71.4 million customers at the end of the first quarter and reported having $1.9 billion in cash. AT&T also pays a dividend of 4.98%.

Conclusion
The legal issues concerning wiretapping, with or without permission, will likely be disputed into the future. However, investors can be certain that demand for wireless and data services will continue to rise. While now may not be the best time to jump in, a dollar-cost averaging strategy could prove fruitful given the healthy dividends paid by both.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

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