Major Share Buybacks Won’t Dent AT&T, Verizon Wallets
Multi-billion-dollar share repurchase programs announced by Verizon and AT&T won’t hold back wireless network expansions, but could reflect an economic recession, analysts said in interviews. Verizon said Thursday it would buy back 100 million shares of common stock, worth $36.95 after the market closed. In December, AT&T said it would buy back 400 millions shares, worth $37 each. The Verizon buyback expires in 2011. AT&T’s finishes in 2009.
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Buybacks indicate AT&T and Verizon “believe the market is significantly undervaluing the stock,” said Jefferies analyst Jonathan Schildkraut. They see “repurchasing shares as a better opportunity for increasing returns than making further investments into other telecom areas,” he said. A buyback is also a way to “buoy shareholder value without making the same forward commitment to distributing cash to shareholders that a dividend increase does,” he said. Meanwhile, the size of the buybacks show that AT&T and Verizon “produce a ton of free cash flow,” he said.
Buying shares won’t handicap carriers’ ability to expand wireless networks or bid in the 700 MHz auction, analysts said. “Not at all,” Schildkraut said. Expansion “is where they will spend their dollars -- greatest return.” Moody’s analyst Dennis Saputo concurred. “AT&T and Verizon network build out is “certainly manageable given the strong growth they are experiencing in their wireless operations and the rapidly expanding cash flows coming from that business,” he said. But “if they get very aggressive in returning cash to common stock holders it could limit their financial flexibility and have negative implications for their credit ratings,” he warned.
It’s unknown what AT&T and Verizon will spend in the 700 MHz auction, Saputo said. However, “if you assume that what both of them spend accounts for 50 percent of total auction bids and assume AT&T’s $2.5 billion Aloha purchase reduces their need proportionately and that the auction ends up at $20 billion, they each will spend $5 billion total,” he said. “That is manageable for both at current ratings assuming stock repurchases are spread out over time and matched to cash flows and earnings growth.”
Buybacks could reflect the economic slowdown, said Wintergreen Research analyst Susan Eustis. Many wireless customers will cut back on minutes, shop for less expensive plans or cancel service, she said. Recessions reduce stock prices, and companies like to do buybacks “if they have cash and they think the stock is lower than it will be later on.”