11.12.2012 16:20
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Moody's: US Telecoms likely to boost leverage as higher interest and dividend tax rates hit shares

New York, December 11, 2012 -- Yield-hungry investors have driven US telecom stocks to large valuation premiums, but these are unlikely to be sustainable, Moody's Investors Service says in a new report, "Dividend Dilemma for Telecoms: How to Support Stock Prices When Interest Rates Rise."

"Low rates have drawn income-seeking investors to the telecommunications sector, but given the sector's slow growth, current equity premiums are likely to come under pressure from higher dividend tax rates following the 'fiscal cliff' talks in the short term, and from rising interest rates in the longer term," says analyst and author of the report Mark Stodden.

This could set the stage for credit negative actions as companies seek to support their stock prices, Stodden says. They could increase dividends in line with interest rates, seek growth through debt-financed capital investments or M&A, or borrow to buy back shares. All these actions could lead to higher leverage, and ultimately pressure companies' ratings.

If fiscal cliff negotiators allow the current 15% dividend tax rate to expire at the end of this year, a 35% dividend tax rate would reduce the weighted average after-tax telecom dividend yield to 3.4% from 4.5%, narrowing its risk premium to the 10-year Treasury yield by 105 basis points.

And the 10-year US Treasury yield is projected rise to 4.1% in late 2015 from about 1.6%, also making telecom stocks less attractive. "Combined with a 35% dividend tax rate, we estimate that the premium of the after-tax telecom dividend yield to the 10-year Treasury could decline to 80 basis points from 345 currently," Stodden says.

Among the large telecoms, AT&T has announced plans to increase leverage to fund additional capital investment and continue share repurchases, while Verizon has less flexibility to act due to its lower rating and limited free cash, but the most incentive to do so. The smaller, lower-rated companies have still less flexibility, and are currently trying to reduce their debt while at the same time maintaining their credit profiles and sustaining high dividend payouts.

Moody's research subscribers can access this report at http://www.moodys.com/research/US-Telecommunications-Dividend-Dilemma-for-Telecoms-How-to-Support-Stock--PBC_147762.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York+1-212-553-0376, London+44-20-7772-5456, Tokyo+813-5408-4110, Hong Kong+852-3758-1350, Sydney+61-2-9270-8141, Mexico City001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Mark StoddenAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653John Diaz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."

Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.

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This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

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