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December 15, 2008

Goldman Downgrades AT&T to Neutral

AT&T was downgraded to neutral form buy by Goldman Sachs today offsetting the good news from Friday when the company increased its annual dividend by 2.5%. Yes, that is a token amount but it is still a message about the strength of the company's financial position and the resiliency of its cash flow relative to many other blue chip companies that are either cutting or maintaining their dividends.

The Goldman downgrade is based on a sharp cut they are making to their 2009 estimate due to pension expenses and weaker enterprise segment revenues. The estimate is being cut to $2.40 from $2.85. Consensus was $2.84. 26 cents of the cut is due to higher pension expense as a result of an expectation that in the past a 20% drop in pension return was recognized by AT&T. Most of the rest cut comes from Enterprise where Goldman now expects a 7% drop in revenues from prior expectations for flat. There is also a slight hit form a small cut in wireless revenue due to the economy and a few pennies for more dilution form growth initiatives.

This downgrade will hit AT&T shares today and also cut sharply against the momentum the stock has had since coming off its October and November lows. Gary Morrow has indicated that the stock should strong support at $27. I bought the stock week before last on a pullback toward that level. This downgrade will hurt my investment thesis for the short-term but I intend to hold given the high current yield (5.7%), unstressed balance sheet, and still strong free cash flow (the pension hit will be mostly non-cash).

Posted by Steve Birenberg at December 15, 2008 09:02 AM in Telephone