AT&T and Verizon Communications face billions of dollars in unfunded pension liabilities, which could significantly weigh on their bottom lines, according to one Wall Street analyst.
If the market closed today, AT&T could be on the hook for $41.6 billion in unfunded pension liabilities, while Verizon could see $31.6 billion in liabilities, Sanford C. Bernstein analyst Craig Moffett said in a research note issued today. Moffett downgraded AT&T's stock rating and maintained his already low rating on Verizon.
The pension liabilities could be costly to the companies and shareholders. Moffett estimates that the funding requirements could hurt AT&T's earnings by $1.04 a share this year and cut into Verizon's earnings by $1.34. He also lowered his stock price targets for the companies by $1 each, to $30 for AT&T and $32 for Verizon.
AT&T and Verizon's pensions will be less than 80 percent funded, which could trigger required employer contributions mandated by the Pension Protection Act, Moffett said. He added that only General Motors would have a larger pension obligation than AT&T.
AT&T, however, said it wasn't worried and noted that it had generated the highest amount of free cash flow in two years, despite higher capital spending.
"We will make any decisions about potential pension funding at the end of the year, as we always do," an AT&T representative said. "But as we said on last week's earnings call, we anticipate that we can manage any pension funding with the cash flows that we are generating."
Verizon, meanwhile, noted the extreme volatility in the markets, making it "impossible to predict with any level of accuracy what asset returns and discount rates will be on the last day of the year."
"We have not disclosed the details of any fourth-quarter remeasurement charges or expectations for 2012 pension funding," said a spokesman.
The telecommunications companies, like several other older industries with a large base of unionized employees, are saddled with large pension costs paid out to retirees. While many of the companies have cut back on their pension offerings, many older employees and retirees are grandfathered into the system and continue to draw their benefits.
The need to cut back on benefits was the impetus for the brief strike held by Verizon workers in August. The union opted to halt the strike and head back to the bargaining table, but no resolution has yet been made.
Not all is bleak. Moffett said AT&T's rich dividend should keep its stock from falling too low. He said he preferred AT&T over Verizon, which has a smaller dividend cushion and a valuation he believes is "badly stretched."
Updated at 9:22 a.m. and 1:37 p.m. PT with a comment from AT&T and Verizon.