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Dividend Bubble A 'Double Edged Sword' For Telcos

Stocks in this article: T VZ AAPL

At the early part of 2012, Moffett took exception to telecoms like AT&T, Verizon and Sprint (S) as investments, ahead of their outperformance through the first half of the year on strong wireless earnings and M&A speculation.

In particular, Moffett highlighted earnings-wrecking Apple iPhone 5 subsidies, margin declines, pension liability and capital spending as reason for caution, amid the sector's outperformance.

While Moffett's view proved mistimed for much of 2012, a recent string of analyst downgrades thanks to AT&T and Verizon's expected declines in wireless margins and both companies' recent underperformance, supports the underlying analysis.

As part of AT&T's Thursday 8-K filing, the carrier also disclosed it sold 10.2 million iPhones in the fourth quarter, more than previous analyst estimates. The disclosure caused Moffett to further cut his earnings estimates for AT&T and Verizon, in a Friday analysis.

While the analyst's bearish 2012 analysis of the telecom sector is likely to finally play out in fourth-quarter earnings next week, it might also set the stage for another strong year for the telecom sector.

Evercore Partners analyst Jonathan Schildkraut wrote in earnings previews that a fourth-quarter miss on iPhone subsidy costs could represent a buying opportunity for AT&T and Verizon investors.

After taking in AT&T's disclosure, which also contains $175 million in Hurricane Sandy related operating charges, Schildkraut reiterated that perspective. " We believe that weakness resulting from this margin pressure could lead to a buying opportunity," he wrote of AT&T and Verizon's upcoming earnings.

Gimmie Credit analyst Dave Novosel wrote in a Friday note that while pension adjustments and smartphone user growth will hit upcoming telecom earnings, they could pave the way for gains in coming quarters.

" It seems to us that companies are typically looking in the rearview mirror when it comes to pension discount rates," Novosel wrote in a Friday research report that argues rising interest rates could eventually reverse pension actuarial losses. Meanwhile, a short-term iPhone subsidy margin hit could give way to "substantial profits" over the long-term for AT&T and Verizon, argues Novosel in the report.

Verizon reports earnings on Jan. 22, with analysts expecting 51 cents a share in adjusted profit on $29.8 billion in revenue, according to analyst estimates compiled by Bloomberg. AT&T reports on Jan. 24 with analysts expecting an adjusted profit of 46 cents a share in $32.2 billion in revenue, the Bloomberg data show.

-- Written by Antoine Gara in New York

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