Is AT&T Stock a Buy After Falling to a 33-Year Low?

Shares of AT&T (T) sank to a 33-year low on Tuesday and are down more than -20% this year.  AT&T and other telecom stocks plunged after the Wall Street Journal last week reported that AT&T, Verizon Communications (VZ), and other telecom giants have left a network of cables covered in toxic lead that stretches across the U.S., under the water, in the soil, and on poles overhead.  The potential risk of liabilities over lead-clad cables in parts of AT&T’s nationwide network and the uncertainty over the size of the cleanup costs have hammered the stock. 

According to Moody’s Investors Service, AT&T is the most exposed company to the lead-clad cable issue and warns of “very significant” potential costs to remove the old wires. The worries over the lead-cable issues are also raising concerns about whether AT&T can maintain its dividend payments, which is deterring buyers from jumping into the stock.  Aptus Capital Advisors said, “Don’t go dumpster diving here,” as it sees little room for AT&T shares to move higher in the near term.

AT&T recovered slightly from its plunge to a 33-year low Tuesday after the company said Wednesday that it “strongly disagrees with the Journal’s reporting” and that lead-clad cables make up less than 10% of its network.  AT&T noted that of the 2 million miles of cables in question, two-thirds of the cables are “either buried or in conduit.”

AT&T shares were already on the defensive this year, contending with a slowdown in subscriber growth and the potential disruptive entry of Amazon.com into wireless service.

A Bloomberg Intelligence estimate puts the total cost of lead cleanup for the telecom industry at about $43 billion, and according to JPMorgan Chase, AT&T’s costs for removing cables could be as much as $13 billion.  Argus Research, who downgraded AT&T to a hold rating from a buy on Wednesday, said, “The shares could face additional pressure until AT&T and its industry peers can determine the extent of the environmental risk and the costs of potential mitigation.” 

The plunge in AT&T has reduced its valuation to one of the cheapest in the S&P 500 ($SPX) (SPY).  The stock trades at about 5.9 times forward earnings, among the seven cheapest stocks in the index.  AT&T’s 7% dividend is attractive to many investors and may support the stock at current prices even with the uncertainty associated with the lead cable issue. However, Zacks Investment Management said, “If the litigation scope and the cost of it begin to erode those cash flow metrics where the dividend might be under pressure, then we’ll definitely reconsider” owning the stock. 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.