The shares of Qwest Communications, the fourth largest US telecommunications group, fell on Thursday after the Denver-based company announced a $2bn share buyback but disappointed some investors who were hoping for a dividend payment.
Qwest’s shares dropped 28 cents, or 3.3 per cent, to close at $8.42 on the New York Stock Exchange. The company announced the buy-back – equivalent to about 12 per cent of its outstanding stock – on Wednesday after the market closed.
The buy-back, which was larger than most analysts had been expecting, will be conducted over two years. But investors had also been expecting Qwest, which came close to bankruptcy a few years ago, to begin dividend payments.
“We thought it was possible that Qwest could announce a dividend pay-out ratio of up to 50 per cent,” said David Janazzo of Merrill Lynch in a note to investors.
Nevertheless, most analysts also agreed that the buy-back signalled greater confidence at Qwest and a shift towards revenue growth following several years of retrenchment.
Qwest had promised to reward shareholders after recent financial results showed a strong recovery in its finances. In August, it posted a second straight quarterly profit, reflecting the success of its cost-cutting and strong growth in broadband subscribers.
Qwest’s shares are still a fraction of their 2000 peak of more than $60, but, like other US telecoms stocks, have risen steadily over the past year, gaining more than 47 per cent.
The revival in telecom stocks is seen as reflecting growing investor confidence that the recent wave of consolidation will deliver cost savings and mitigate cut-throat competition in some markets.
The big US carriers have also been signalling that they expect their fast expanding mobile operations to continue to grow and that broadband and IPTV initiatives are on track and will help offset the impact of growing competition from cable operators and a decline in local access lines.
AT&T’s share price is up 30 per cent this year, while shares in BellSouth, its pending merger partner, are up 55 per cent. Both companies have been buoyed by the strength of their Cingular Communications mobile joint venture, which has been quickly gaining subscribers and boosting margins.
Verizon Communications, which has lagged its peers, in part, because of its hefty investment in a new fibre-based network to support advanced video delivery, has gained 23 per cent.
The New York-based group’s stock fell sharply last year amid growing concern that investments in its FiOS fibre-optic network – seen by Verizon’s chief executive, Ivan Seidenberg, as vital to the company’s future – would not pay off.
Last week, Verizon put a price tag on its FTTH (fibre to the home) initiative for the first time, estimating it would spend $22.9bn to rewire more than half its network by 2010 so it could sell television and video-on- demand services along with high-speed broadband connections.
But it also expected to save $4.9bn in operating expenses with the network upgrade, which is expected to reduce maintenance costs.