This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Dividend Bubble A 'Double Edged Sword' For Telcos

Updated to reflect Gimmie Credit analyst comments

NEW YORK (TheStreet) - For investors, the near 5% dividend yields of telecom giants AT&T (T) and Verizon (VZ) proved a safe trade in 2012, amid continued Federal Reserve easing and an uncertain economic backdrop. Now, as both carriers prepare for fourth-quarter earnings, the Fed's low interest rates are proving a 'double edged sword.'

While low interest rates continue to make AT&T and Verizon a safe yield trade for flighty stock market investors, the Fed's support of cheap money is also wreaking havoc on their balance sheets.

Notably, AT&T and Verizon now face multi-billion dollar fourth-quarter charges as they adjust unfunded pension liabilities to reflect lower projected interest-based earnings. Meanwhile, low rates are also increasing the present value of pension liability.

On Thursday, AT&T said it will take a $10 billion charge as it adjusts the value of pension liabilities to reflect lower interest rates. In two simultaneous balance sheet adjustments, AT&T will record an actuarial loss of roughly $12 billion as it lowers its return estimates on assets to cover pension plan liabilities from 8.25% to 7.75%. AT&T is also lowering the discount rate on its unfunded pension liability from 4.3%, increasing the net present value of those costs.

AT&T's $12 billion actuarial loss is offset by roughly $2 billion in asset gains, putting the telecom giant's fourth quarter earnings hit at $10 billion.

In the fourth quarter, Verizon will record a similar sized charge to reflect the impact of low interest rates.

In an 8-K filing with the Securities and Exchange Commission earlier in January, Verizon said it expects to record a pre-tax charge of between $7 billion and $7.5 billion in the fourth quarter due to a reappraisal of pension and postretirement liabilities. Verizon also said it will record between $1 billion and $1.5 billion in charges as it calls in debts early and books restructuring costs.

For AT&T and Verizon, the pension losses don't impact operating results or margins, which will be closely followed by investors and analysts as they try to quantify the impact of Apple (AAPL) iPhone 5 subsidy costs on wireless earnings.

Still, for some watchers of telecom stocks, the earnings-wrecking fourth-quarter charges highlight a hitch in the logic that makes both dividend-yielding telecom carriers attractive investments in a low rate environment.

A year ago, telecom sector analyst Craig Moffett of Bernstein Research highlighted a troubling interplay between low interest rates and pension liabilities as one reason to hold a negative view of both carriers.

"Last year, we downgraded AT&T in the wake of declining interest rates, noting that low prevailing interest rates are a double-edged sword," wrote Moffett, in an Friday note to clients. "Low interest rates make AT&T's and Verizon's dividend yields enticing for investors. But it's precisely these low rates that wreak havoc on the Telcos' massive unfunded pension and OPEB liabilities," the analyst added.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,960.57 -123.23 -0.72%
S&P 500 1,978.34 -9.64 -0.48%
NASDAQ 4,449.5640 -22.5440 -0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs