Hang Up on AT&T and Verizon

My guess is that most shareowners of AT&T (T - commentary - Trade Now) and Verizon (VZ - commentary - Trade Now) are value investors who like substantial dividend distributions. Those investing attributes are as good as any and probably better than most. With yields above 6% and forward P/Es below 12, bulls can argue these defensive stocks are cheap and would make an attractive addition to a long-term portfolio.

But I've seen the telecom services movie before, and it doesn't end well. That's why I believe AT&T and Verizon are both a sell from here. To illustrate my point, let's review what's transpired in the industry over the last 25 years.

In 1984 the AT&T monopoly was broken up. When the dust settled, AT&T remained in the long distance, computer and hardware businesses, and seven Regional Bell Operating Companies (RBOCs, or "Baby Bells") were born to serve as the local phone company of their respective regions.

The stage was set for competition in the long-distance business, and upstart alternative long-distance carriers like MCI (now part of Verizon) and Sprint (now part of Sprint Nextel (S - commentary - Trade Now)) had a field day taking share from Ma Bell as they drove down prices.

Resellers got their piece of the pie in the late '80s and in the '90s. These entrepreneurs didn't need to build any network or buy any switches; they simply contracted to buy minutes wholesale and re-bill the calls to end-users at a huge savings. This new distribution channel began to erode margins even further as the incumbents had to compete against resellers of their own networks.

The new century would usher in the age of voice over Internet protocol (VoIP). This technology would allow cable companies like Comcast (CMCSA - commentary - Trade Now) and Cablevision (CVC - commentary - Trade Now) to cross-sell a flat-rate calling service to their entrenched customer bases. Once again -- more price competition, more customer defections.

---

At the time of publication, Masino had no positions in the stocks mentioned, but positions can change at any time.

Rich Masino is president of Private Investor Research and editor of The Substantial Investor. He is a private investor who manages a family long/short investment portfolio that holds numerous positions across a variety of asset classes.

Before starting Private Investor Research, Mr. Masino co-founded a telecommunications company that grew to 500,000 customers. He sold all of his interests in the company in 1998.

He holds an MBA in finance from St. John's University.