Will the Federal Government Give Verizon and AT&T a Dividend Boost?

11/29/17

By Jamal Carnette, MotleyFool

The stock market has rallied under President Trump's administration: The S&P 500 has gained more than 21% since the election. As of this writing, the Dow Jones Industrial Average has produced 60 new closing record highs this year alone. Unfortunately, investors in telecommunications companies have not experienced any benefit, as both Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) have both seen their stocks fall since the 2016 presidential election.

T Chart

DATA BY YCHARTS.

To this point, stock-market ebullience based on politics mostly has been an exercise in faith. Trump's four-pronged business agenda of tax cuts, deregulation, Obamacare repeal, and infrastructure spending has been stymied, for the most part.

Paradoxically, it appears the biggest movement on the deregulation front may aid these telecommunications giants, which have not participated in the rally. The Federal Communications Commission (FCC) is moving forward with a plan that could increase the profits of all internet service providers (ISPs), and give a boost to dividend giants like Verizon and AT&T.

Desk with words "Net Neutrality" carved into it with a computer on it.

IMAGE SOURCE: GETTY IMAGES

The FCC's two-pronged attack on net neutrality

In 2015, Obama-era FCC chairman Tom Wheeler designated ISPs as common carriers under Title II of the telecommunications act after earlier attempts to apply net neutrality were stymied by the courts. When new FCC chair Ajit Pai assumed leadership, he immediately called the regulations "heavy handed" and promised to undo the classification. This month, Pai outlined his repeal plan, the "Restoring Internet Freedom" order; it's expected to pass next month.

Not satisfied with a simple repeal, Pai appears to have gone even further. The FCC also announced its intent for federal pre-emption, blocking states that want to enforce their own regulations from doing so, and agreeing with AT&T, Verizon, and Comcast, which all lobbied for federal restrictions on state-level regulators. With one move, Pai essentially guaranteed that net-neutrality rules never would be applied to ISPs in the United States.

Net Neutrality gives a boost to stocks showing signs of strain servicing their dividends

AT&T and Verizon could use the help: Both are facing diminishing prospects in other business lines. Wireline telephony continues to suffer as wireless has become the de facto communication method. Recently, wireless telephony has seen profit stagnate under pricing pressures from T-Mobile and Sprint via unlimited data plans. Subscription TV has also been under pressure due to streaming-based substitutes and cord-cutters. The only true growth area has been ISP.

Meanwhile, both AT&T and Verizon have large needs for cash. In addition to the need to pay to maintain and upgrade the networks listed above, both have large commitments to financial stakeholders. Between bondholders, dividend payouts, and capital expenditures, Verizon paid $31.6 billion in the last 12 months, while AT&T paid $40.5 billion.

While free cash flow is currently supportive of both companies' dividends, the combination of large cash payouts, declining prospects in most business lines, and higher interest rates in the future has led to concerns about each company's ability to continue servicing its dividends in future years.

ISPs agreeing to net neutrality is a dereliction of their duties

Many ISPs shocked observers when they noted they agreed with the broad tenets of net neutrality. Comcast even crafted a heavily trafficked blog post addressing the subject -- while speaking out against Title II designation. Critics counter that Comcast has broken promises to regulators before, and it's different when profit is concerned. In fact, as CEOs have a fiduciary responsibility to shareholders, it's almost a dereliction of their duty to not at least look into fully monetizing their assets.

Net neutrality made their ability to monetize their Internet assets more difficult. Once it's repealed, the companies are legally free to block, meter, or slow traffic as they wish, with potential losers being everybody that depends on content delivered on the internet. Not to take full advantage of this is doing a disservice to their shareholders.

Whether or not ISPs will do so is anybody's guess for the time being. It appears, however, that the executive branch of the federal government no longer considers this an issue worthy of regulation.

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