Shares of AT&T (T) are on the rise after Citi analyst Michael Rollins upgraded the stock to Buy as he expects the company to further benefit from the "measured" promotional environment in wireless, while improving its competitive position from FirstNet and the marketing of its network enhancements. Meanwhile, rival Verizon (VZ) has announced that the cost of its employee buyout plan, which will reduce its headcount by 10,400 through June 2019, will range between $1.8B-$2.1B and will be recorded in the fourth quarter.
CITI SAYS BUY AT&T: In a research note to investors, Citi’s Rollins upgraded AT&T to Buy from Neutral with an unchanged price target of $34. The analyst said he expects AT&T to further benefit from the "measured" promotional environment in wireless, while improving its competitive position from FirstNet and the marketing of its network enhancements, branded 5G Evolution. Further, he argued that the company has "several levers" to manage free cash flow and support its net debt deleveraging goals for 2019. The stock's 23% decline year-to-date provides a better risk/reward scenario, the analyst contended, pointing out that AT&T trades at a price-to-earnings ratio of about eight times the analyst's revised 2019 outlook and at a dividend yield of about 6.7%. Rollins sees a buying opportunity at current share levels. Reiterating an Overweight rating on AT&T’s shares, his peer at Morgan Stanley told investors in a research note of his own that he expects the company to raise its quarterly dividend to 51c from 50c per share as early as Friday, which would be in-line with its timing last year. Analyst Simon Flannery would view such an increase as a signal of confidence in the recent 2019 business and financial outlook.
OTHER RECENT UPGRADES: On December 3, AT&T was upgraded by two other Wall Street firms to buy-equivalent ratings. Cowen analyst Colby Synesael upped his rating on the shares to Outperform as he believes the plan laid out to get Entertainment EBITDA stable appears “credible,” the dividend is safe and the stock is cheap. Meanwhile, his peer at JPMorgan, analyst Philip Cusick, upgraded AT&T to Overweight after leaving recent management meetings and the company's analyst meeting with a better understanding of expectations around organic growth as well as how AT&T plans to de-lever the business using organic free cash flow and asset sales.
VERIZON RESTRUCTURING PLAN: In a regulatory filing, Verizon said that in September, it announced a voluntary separation program for select U.S.-based management employees. Approximately 10,400 eligible employees will separate from the company under this program by the end of June 2019, with nearly half of these employees exiting in December of 2018. Principally as a result of this program but also as a result of other headcount reduction initiatives, the company expects to record a severance charge in the range of $1.8B-$2.1B, or $1.3B-$1.6B after-tax, in the fourth quarter of 2018. Additionally, the company says "Verizon's Media business, branded Oath, has experienced increased competitive and market pressures throughout 2018 that have resulted in lower than expected revenues and earnings. These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Oath has also achieved lower than expected benefits from the integration of the Yahoo and AOL businesses. […] In connection with Verizon's annual budget process in the fourth quarter, the new leadership at both Oath and Verizon completed a comprehensive five-year strategic planning review of Oath's business prospects resulting in unfavorable adjustments to Oath's financial projections. These revised projections were used as a key input into the Company's annual goodwill impairment test performed in the fourth quarter. […] the Company expects to record a non-cash goodwill impairment charge of approximately $4.6B, or $4.5B after-tax, in the fourth quarter of 2018. The goodwill balance of the Oath reporting unit was approximately $4.8B prior to the incurrence of this impairment charge." Verizon expects to complete an internal reorganization of legal entities associated with its wireless business in December 2018. Upon completion of this reorganization, Verizon expects to recognize a non-recurring deferred tax benefit of approximately $2.1B in the fourth quarter of 2018, which will reduce the company's deferred tax liability by the same amount.
PRICE ACTION: In morning trading, shares of AT&T have gained over 2% to $30.63, while Verizon’s stock has advanced about 1% to $59.07.
