Although they may be sporting enticing dividend yields in the 7% range at the moment, and are trading near 52-week lows, communication giants Verizon (NYSE:VZ) and AT&T (NYSE:T) are not likely to see much upside until the regulatory threat to one of their key businesses clears up. (Learn more, see Dial Up Choice Telecom Stocks.)
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Regulating Broadband Services
For some time now, the Federal Communications Commission (FCC) has set its sights on extending its regulatory reach to include the provision of broadband internet services. For the owners of those broadband pipes, the telephone and cable companies, such a move by the FCC could put a serious dent in the profitability of those operations.
For its part, the FCC wants to ensure that the internet remains a level playing field, where all content providers, big or small, have the ability to reach audiences at the same speed. That goes against the current plans of the network operators who envision a two-tier internet, wherein customers willing to pay higher fees would get more and faster access. Because it wants to avoid paying higher fees for service, Google (NASDAQ:GOOG) is firmly on the side of the FCC in this battle.
Round one of this fight has gone to the network operators, after a U.S. court ruling last April found that the FCC failed to show it had the right to regulate broadband in a case involving Comcast Corp. (NASDAQ:CMCSA). Since then, the FCC has altered its approach, arguing that broadband is a telecommunications service. If this line of argument succeeds, then the entire broadband business could be subject to monopoly-era phone rules which would restrict profitability to allowed rates of return. This would likely result in single-digit returns on investment. In light of such a prospect, the industry is now reconsidering billions of dollars of new investment to upgrade infrastructure.
The Bottom Line
Give the glacial pace of legislative change in Washington these days, it could be years before this issue is resolved, with the only winners being the lawyers hired to argue each sides case. Such ongoing uncertainty is likely to limit the upside of the broadband providers for the foreseeable future. However, for those investors willing sit back and wait for the final outcome in this battle between government and industry, a 7% yield is not a bad return for a little patience.
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