Verizon Communications Inc.’s stock has been under pressure in the wake of recent reporting on legacy lead-sheathed cables used within the telecommunications industry, and one analyst worries the stock could stay in the penalty box.
Edward Jones analyst David Heger downgraded Verizon shares VZ, -7.50% to hold from buy Monday, writing of his concerns after the Wall Street Journal reported on the lead cables that were used in the past by telecommunications companies and that are still in the ground and elsewhere today.
“We are uncertain if remediation measures could be required by environmental regulators and whether health concerns could cause sizable litigation liabilities,” Heger wrote. “Similar to other companies that have faced environmental health issues, we think that uncertainty around these issues could limit share appreciation for Verizon.”
Shares of Verizon were down 7.5% Monday, while shares of AT&T Inc. T, -6.69%, downgraded at Citi Monday, were off 6.8%.
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Heger keyed in on Verizon’s dividend in his note to clients. The stock’s yield had already been “elevated” at upwards of 7% before Monday’s trading began, “which may indicate concern about the dividend’s sustainability,” he wrote. While Verizon’s dividend coverage is expected to improve as 5G spending falls this year and next, Heger wonders if the “overhang” related to lead-sheathed cables will limit the company’s flexibility.
The cost of potential environmental-remediation measures “is difficult to estimate and might limit Verizon’s ability to increase its dividend while covering these costs,” he wrote. “We think these concerns are balanced with our expectations for improvements in consumer wireless, continued growth in wireless revenue, and improving free-cash flow as Verizon completes 5G network investments.”
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Verizon directed a request for comment to USTelecom, a trade association of which it is a member.
“We have not seen, nor have regulators identified, evidence that legacy lead-sheathed telecom cables are a leading cause of lead exposure or the cause of a public health issue,” a spokesperson for the trade group said last week.
The spokesperson added Monday that there are various considerations that determine “whether legacy lead-sheathed telecom cables should be removed or should be left in place, including those regarding the safety of workers who must handle the cables, potential impacts on the environment, the age and composition of the cables, their geographic location, and customer needs as well as the needs of the business and infrastructure demands.”
The industry “stands ready to engage constructively on this issue,” the spokesperson said.
Raymond James analyst Frank Louthan IV, meanwhile, wrote that Wall Street seems to be “materially off base” with expectations for the cost of cable removals, which he thinks won’t be as high as investors anticipate. He’s also not sure if the cables will all need to be removed given “apparent lack of action to date” on the part of regulators.
“When we put all this into perspective, and given that this was within the environmental regulations of the time and risk of increased contamination is low, it seems reasonable that the cost of this will be spread out over 10+ years, further minimizing the risks to the carriers and their investors,” Louthan wrote.
He added that the focus likely “will shift from cable removal to liability for workers that had reasons to claim ingestion and the related harm, which has a higher likelihood of being covered with various insurance the industry has.”
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