Q. I’m an AT&T Corp. shareholder seriously reconsidering my telecom holdings. What is the outlook for the company?
B.P., via the Internet
A. The nation’s largest long-distance carrier keeps tightening its belt. Despite its enormous annual revenue, consistent capital spending and excellent ratings on J.D. Power customer-satisfaction surveys, Ma Bell faces fierce price wars and competition from wireless and Internet-based calling.
It has aggressively expanded its offering of bundled local and long-distance services to reach a total of 35 states. It also plans to offer Internet-based telephone service in the top 100 U.S. markets by the end of this year.
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To cut costs, the company has frozen pay for 43,000 managers during 2004 and last year postponed employee raises due in April until September. It eliminated 12 percent of its workforce in 2003, taking a $60 million charge in the fourth quarter to cover the cost.
There have been executive shake-ups. President Betsy Bernhard resigned after 13 months on the job because of disappointing sales. She was replaced by William Hannigan, chief executive officer of the Sabre Holdings Corp. travel firm, who previously worked with AT&T Chief Executive Dave Doman at Sprint and SBC Communications.
Hannigan’s goal is to boost revenues from AT&T’s business service, which are in decline as Baby Bells enter the long-distance market with discounts, and long-distance rival MCI continues to cut rates.
Shares of AT&T are up 6 percent this year, following declines of 19 percent in 2003 and 28 percent in 2002. It boosted its dividend payout in the wake of the U.S. Congress cutting taxes on dividends.
The stock rates a consensus “hold” recommendation from analysts who track it, according to the Boston-based First Call research firm. That consists of 7 “buys,” 10 “holds” and 13 “sells.”
AT&T earnings are projected to decline 31 percent this year, versus the 6 percent drop forecast for the fixed-line telecommunications industry. Earnings are expected to go down 18 percent in 2005, and the projected five-year annualized decline is also 18 percent.
Cisco Systems Inc. and AT&T recently expanded their existing marketing and sales alliance in the U.S. to add Europe, the Middle East and Africa. This should improve the AT&T networking services that use Cisco technology and there will be collaboration on planning.
An audit proved embarrassing last year. AT&T fired two employees for not following proper procedures and concealing $125 million in expenses during 2001 and 2002. It said those accounting problems didn’t materially affect earnings.
Q. I’d like to add to my international holdings. What do you think of Vanguard International Growth Fund?
S.S., via the Internet
A. The thrill is gone. Though its long-term record is excellent and its annual expense ratio is a low 0.67 percent, this fund has seen better days.
The $5.9 billion Vanguard International Growth Fund (VWIGX) gained 20 percent over the past 12 months and had a three-year annualized decline of 4 percent.
Both results rank above the midpoint of large growth and value funds.
“It just doesn’t seem to have any `oomph’ anymore, which is what you want in a fund,” said Daniel Wiener, editor of The Independent Adviser for Vanguard Investors (www.adviseronline.com), 7811 Montrose Rd., Potomac, Md. 20854. “If you’re looking strictly for foreign large-cap growth, you could go with this fund, but there are better alternatives for people seeking an international component for their portfolio.”
He considers Vanguard International Explorer (VINEX), which emphasizes small-cap stocks, to be superior.
An acknowledgement of Vanguard International Growth’s lackluster recent history was the transfer of 20 percent of its assets from longtime manager Richard Foulkes to a management team at Scottish firm Baillie Giffford a year ago. That team’s past results weren’t all that strong and the potential for volatility has gone up because it’s willing to pay for quality stock.
In charge since the fund’s inception in 1981, Foulkes focuses on moderate growth by buying blue-chip stocks in developed markets and is willing to commit a chunk of money to value plays.
Twenty-two percent of assets are in the United Kingdom, 20 percent in Japan and 10 percent in France. Other significant concentrations are Switzerland and South Korea.
Largest holdings among its 187 stock names are South Korea’s Samsung; the U.K.’s Tesco, Vodafone, Royal Bank of Scotland, Compass Group and Kingfisher; Switzerland’s Nestle and Credit Suisse; Ireland’s Allied Irish Banks; Japan’s Toyota Motor, Mitsui, Ricoh, Takeda Chemical and Murata Manufacturing; Italy’s Telecom Italia; Finland’s Nokia; Hong Kong’s Sun Hung Kai Properties; and France’s L’Air Liquide and Vivendi Universal.
This “no-load” (no sales charge) fund requires a $3,000 minimum initial investment.
Q. My company announced it’s going to buy back some of its stock. Why do companies do this? What does it say about the stock?
A.T., via the Internet
A. Share repurchases, or buybacks, usually signify that management considers its shares to be priced too low.
By purchasing its own shares in the marketplace, the company reduces the number of outstanding shares available to investors. That should increase their value.
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A repurchase also indicates that the company believes it can generate a better return from its own stock than from any other investment. That says to the public that the company considers itself a good investment. If a company is repurchasing shares and raising its dividend at the same time, that’s especially healthy.
But there’s also a cynical view.
“It also boosts earnings a little bit, since by taking more stock off the market the same $1 million in earnings gives higher per-share earnings,” observed Paul Nolte, investment director with Hinsdale Associates, Hinsdale. “It might also be considered a bad thing that the company has all this cash and it can’t find anything worth buying other than its own stock.”
Announcement of a repurchase plan doesn’t mean it happens tomorrow, Nolte added. It may require a year or longer to fully implement.
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Andrew Leckey is a Tribune Media Services columnist. Write to him in care of Your Money, Room 400, 435 N. Michigan Ave., Chicago, IL 60611, or via e-mail at [email protected].