Some troubling news came out last week for anyone investing in AT&T (NYSE:T). The Securities and Exchange Commission (SEC) is suing the telecom giant for misleading investors by providing nonpublic information to a group of 20 analysts ahead of a pivotal earnings release in the spring of 2016. This information prompted the analysts to lower their consensus revenue estimates, thereby allowing AT&T to “beat” Wall Street expectations when it released its quarterly earnings later that year.
Here are more details concerning the lawsuit, and why it should make any investor nervous about owning the stock going forward.
This whole debacle started in the spring of 2016. AT&T management saw that sales were slowing due to a dropoff in smartphone renewals, and could tell that the company was going to miss Wall Street’s quarterly revenue estimates when it publicly reported earnings in April. To mitigate this concern, CFO John Stephens instructed his Investor Relations Department to “work the analysts who still have equipment revenue way too high.”
What this meant in practice was talking to individual analysts on a one-to-one basis and showing them internal revenue numbers that hadn’t yet been released to the public, with the goal of trying to convince them to lower their revenue targets for the upcoming quarter. The strategy ended up working, with many of the analysts lowering their estimates before the earnings release date, allowing AT&T to “beat” the revised estimates by $100 million.
It should be noted that these are just allegations from the SEC, and have not been tried in front of a judge and jury. AT&T, as you might have guessed, is disputing the SEC’s claims, saying its IR department didn’t give away any nonpublic information to third-party analysts.
Why it matters
The SEC complaint against AT&T doesn’t call for revised financial statements, and it doesn’t allege that AT&T has committed fraud. Rather, the regulator alleges that the telecommunications juggernaut violated Regulation FD, an important rule that requires fair disclosure of material information.
The company might have the lawsuit decided in its favor, or settle the charges with a monetary penalty. But no matter what happens, the complaint does show a culture of deception, at least within the finance department — and the CFO who was around during these shenanigans is still at the company today. A company that focuses on beating short-term expectations is liable to miss the forest for the trees, and is likely spending less time on projects that can build shareholder value over the long-term.
This SEC investigation is not a death knell for AT&T. The company still has its wireless network, will still pay a $2.13 dividend (for a 7.1% yield), and has millions of customers who won’t be going away anytime soon. However, if you are a long-term investor who cares about management integrity, you have to ask yourself: Why should I own AT&T when its financial department tried to deceive investors like me?
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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