All Northlake positions in AT&T have been sold in the last couple of trading days. The stock has been a disappointment. It did not participate in the big market rally in 2009, providing only a minimal return through its dividend yield. Among the many issues that have been troubling the stock are (1) weak enterprise spending on telecommunications, (2) bad press on the quality of the company’s wireless network, (3) fear of the loss of iPhone exclusivity, and (3) price competition on low end phone plans.
I have felt these issues were fully discounted in the stock. It was last week’s news that Verizon, followed immediately by AT&T, was cutting prices on unlimited voice minute plans that triggered the decision to sell. I actually do not think that financial impact of the price cuts will be negative on either company. However, 2009 witnessed a downward price spiral on low end, prepaid voice plans. These plans gained market share and restricted subscriber growth for more traditional postpaid plans. I fear that Verizon’s price cut may be just the first in a similar downward spiral for voice pricing on postpaid plans. Prepaid stocks collapsed in 2009, some falling 70% or more.
I do not expect the same for AT&T or Verizon in 2010 even if a price war breaks out due to both companies strong finances and high and stable dividends. But the upside from earnings growth is not enough to compensate for the risk of a price war. Thus, the upside in AT&T shares no longer seems sufficient to account for growing downside risks.