Pacific Telesis Board Expected to Cut Stock Dividend Today
Pacific Telesis Group’s directors meet today amid widespread expectations that the financially challenged phone company will slash its stock dividend--a first for any of the seven Baby Bell companies.
Largely in anticipation of such a dividend cut, the company’s share price had slumped 24% from a recent peak of $35.25 to $26.75 by Wednesday. It inched up 62.5 cents to close at $27.375 Thursday on the New York Stock Exchange.
“I think all of the institutions [that own the stock] are pretty well braced for whatever the decision is,” said Guy Woodlief, analyst at Dean Witter in New York.
But analysts concede that small investors--many of whom have held the stock since the Bell System breakup in 1984--may be less prepared for a lower dividend and could fuel a new selling wave.
A recent survey of Baby Bell shareholders by Prudential Securities found that 65% of small investors would be “very likely” to sell a Bell stock in the event of a dividend cut.
PacTel, the San Francisco-based holding company for Pacific Bell, hasn’t said for certain that its board will cut the dividend, but it has warned in recent months that there are “competing pressures” for funds.
PacTel’s annual dividend is now $2.18 a share. But the company’s earnings have been stagnant since 1989 because of California’s recession, telephone deregulation and heavy capital spending on new technologies such as wireless cable.
The company earned $2.46 a share last year from operations. After paying out the $2.18-a-share dividend, that left relatively little profit to fund the business’ growth.
What’s more, PacTel faces pressure from major bond-rating agencies. On Thursday, Moody’s Investors Service said it placed both PacTel’s and Pacific Bell’s long-term debt ratings on review “for possible downgrade,” citing concerns about the companies’ financing needs for capital spending.
Ron Altman, analyst at Furman Selz in New York, said PacTel’s choice is to borrow as much as $500 million a year--risking a lowered credit rating--or cut the dividend, risking the wrath of shareholders.
“It’s very hard to predict” which way they’ll go, Altman said.
A 30% cut in the dividend, to $1.53 a share, would save the company $280 million a year. A 50% cut would save about $470 million.
How much further, if at all, might the stock price fall if the dividend is indeed slashed?
If the stock were to yield about the same as that of US West Communications, the Baby Bell that PacTel most resembles, the dividend would have to be maintained at about $1.80. That would give PacTel stock, at the current price of $27.375, a yield of 6.6%, equivalent to US West’s.
A deeper dividend cut, therefore, could mean a much lower stock.
