Citi upgrades Verizon and AT&T, says companies can support their nearly 8% dividend yields

Published Tue, Aug 29 20236:32 AM EDTUpdated Tue, Aug 29 202311:16 AM EDT

Telecommunication giants AT & T and Verizon are turning a corner that will make it easier for both companies to maintain their high dividend yields, according to Citi. Analyst Michael Rollins upgraded Verizon and AT & T to buy. He maintained his target price for AT & T at $17 and raised his target price for Verizon by $1 to $40, suggesting shares stand to gain 19.6% and 19.2%, respectively, from where they closed Monday. "A variety of concerns have weighed on Telco sentiment and valuation, including competition, industry structure, higher rates and lead. We see a more constructive investment case for large-cap Telcos," Rollins wrote in a Monday note. "The wireless competitive environment is showing positive signs of stabilization that should help operating performance." Rollins noted that better free cash flow prospects are another potential catalyst to improve net debt leverage and perception regarding support for the stocks' current dividends. Verizon yields 7.8% along with AT & T, FactSet data shows. He also pointed to AT & T's and Verizon's recently introduced round of targeted price increases for existing customers as an indicator of a stabilizing wireless competitive landscape. Longer device holding periods from customers are also reducing upgrade costs, he added. On top of that, both stocks are trading at historically low valuations after this year's declines. Verizon is down nearly 15%, while AT & T has lost 22.8%. T VZ YTD mountain T and VZ in 2023 To be sure, the analyst noted that material concerns remain about the thousands of lead-sheathed cables used and left behind by AT & T and Verizon across the country, which were found posing health, environmental and regulatory risks, as first reported through a Wall Street Journal investigation in early July. Lead is a probable carcinogen. Rollins acknowledged that possible remediation costs for the lead could be in line or less than Citi's current estimates account for, and that costs from litigation remain unclear and will need to be monitored. "If the outcome for lead cabling is more likely in the range of immaterial to remediating the non-buried lead cabling, then we believe the stocks (largely T & VZ) could recover at least one-third, if not more than one-half, of their recent market cap losses of $21B," the analyst wrote. Both stocks were up 1.7% in the premarket Tuesday. — CNBC's Michael Bloom contributed reporting.