Ring up profits with Ma Bell

Herb Greenberg

April 26, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

The big story at AT&T these days is its battle to buy computer giant NCR. From a profit standpoint, however, NCR is insignificant to AT&T, and Wall Street may be missing the real story, or so says Denise Jevne, the San Francisco-based telecommunications analyst for Baltimore's own T. Rowe Price & Associates.

Jevne thinks the former Ma Bell is poised to pocket big bucks when, thanks to regulatory changes, competition heats up in the business of connecting long-distance calls at either end of the line. Access charges, currently the exclusive domain of the regional Bell companies, are the most expensive part of a long-distance call, and they also happen to be AT&T's biggest cost.

As other companies enter the field and these charges fall, AT&T's profits should rise, that is, if the company can avoid passing along all the savings to consumers. Access costs now equal about 40 percent of AT&T's revenues. If they fall to 37 percent, which Jevne says is a conservative estimate, AT&T's profits would leap by as much as 40 cents per share. The company earned $2.51 a share last year.

Jevne thinks that AT&T is a more attractive investment than institutional stalwart IBM. Both companies have dominant positions in their industries, but "long distance is more predictable than the computer industry, AT&T doesn't have any currency exposure while IBM does, and," most surprising, "AT&T has half as much institutional ownership as IBM. It's still viewed as a regulated industry," though it isn't.

Stocks rise sharply once institutions begin buying them in earnest. In the case of AT&T, Jevne thinks the stock will become an institutional pet and could rise to 50 within a year or so as earnings improve. It closed yesterday at 37 1/2 , up 3/8 .

STOCKS OR BONDS? The trick to successful investing, many analysts insist, is to ignore the headlines and ride out the market's volatility.

Seeking shelter in bonds might not be a wise choice. That the suggestion of a study by Chicago-based Ibbotson Associates, which pitted stocks against bonds from 1926 through 1990. According to Ibbotson, the Standard & Poor's index of 500 stocks, with dividends reinvested, grew at an average compound annual rate of 10 percent through 1990, while long-term government bonds turned in a relatively paltry annual gain of 4.5 percent. Treasury bills rose at an annual rate of 3.7 percent, somewhat better than inflation, which advanced at a rate of 3.1 percent.

What, you say you can't wait 64 years for your investments to pay off? Stocks still beat bonds, both corporate and government, over five- and 10-year periods, the Ibbotson study shows. A separate study by the St. Louis-based brokerage firm of A. G. Edwards & Co., pitting several prominent blue-chip stocks against the bonds of the same companies over the past 10 years, showed similar results.

Newsletter writer John Dessauer of Dessauer's Journal contends that long-term stock-investing is certainly better than sitting on cash, no matter what.

COUNTERPOINT: As you might guess, not everybody agrees with the "buy and hold" approach. Art Micheletti, research chief for the San Mateo, Calif., investment firm of Bailard, Biehl & Kaiser, said such buy-and-hold schemes are often floated in the market at or near a top, and that they can be misleading. It works in theory, he says, but investing is an emotional game and most investors "get greedy when the market goes up, and scared when it goes down. They tend to switch from a buy to a sell at the bottom, which means they wind up buying high and selling low." There is always the risk of a sharp market correction, such as the one that began in August 1973; the highs of that year weren't surpassed until eight years later, Micheletti points out. If you must buy and hold, he says, a diverse portfolio of U.S. and international stocks, bonds and cash will outperform a straight U.S. stock portfolio.

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