The Dow Holds Its Own, But What Sent AT&T and Verizon Plunging?

On Wednesday morning, the Dow Jones Industrials struggled to hang on to their recent winning streak, as downbeat economic data and the relentless string of earnings announcements combined to send the index down just 10 points as of 11 a.m. EDT. New home sales plunged 14.5% in March, raising concerns about the strength of the recovery in housing, and a lower than expected reading from a purchasing managers survey also called the state of the economy into question. Particular weakness in telecom stocks AT&T and Verizon  further weighed on the Dow.

AT&T's 3.2% drop led the Dow's decliners and came after the wireless giant announced its first-quarter earnings last night. The company grew its wireless subscriber count by 1.06 million customers, but net income fell slightly from the year-ago quarter even though earnings per share rose due to a reduction in share counts. Revenue growth of 4% was better than investors had hoped, and new subscriptions included 625,000 postpaid smartphone and tablet subscriptions. AT&T's move to get customers to pay for phones in installments rather than relying on subsidies worked well, as the company said that more than 40% of new and upgrading customers signed up for the Next program. Yet even with this encouraging news as well as hundreds of thousands of new high-speed Internet and video subscribers, AT&T shareholders appear concerned that the company merely reiterated its forward guidance rather than adjusting it upward.

Verizon won't announce its results until tomorrow, but investors pulled it down 1% in sympathy with AT&T. With AT&T raising its subscriber counts substantially, the question for Verizon shareholders is whether Big Red can keep pace. With smaller telecom companies fighting for greater market share, AT&T has been more aggressive than Verizon in responding with price cuts and new plans of its own. If all of those new pricing options are attractive enough to make Verizon subscribers switch, the industry leader could find itself forced to react more strongly. If that happens, fears of a brutal price war that could hurt Verizon, AT&T, and the entire telecom industry could move closer to becoming reality.

Telecom makes up a relatively small part of the Dow, so it's easy to dismiss the struggles of AT&T and Verizon has having little influence on the overall market. But given that the two telecoms are among the Dow's highest dividend payers, they get an inordinate amount of attention. Erosion of Verizon and AT&T's high-margin wireless business could have ramifications both throughout the Dow and in the broader stock market.

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