Options traders are more bullish on AT&T Inc. (T:US) than any time since Apple Inc. chose it as exclusive carrier for the original iPhone.
Bets that AT&T shares will rally are the most expensive in almost seven years relative to bearish wagers, amid speculation the stock’s 5.3 percent dividend payout will lure income investors searching for yield. Bulls are speculating the company will weather escalating competition.
“One of the primary reasons to be in this name is yield,” Art Condodina, head of equity derivatives trading at Bank of New York Mellon Corp., said in a March 21 interview. BNY Mellon is one of the most active firms in AT&T options by volume, according to data compiled by Vesel LLC. “Overlaying options on the name can be an additional source,” Condodina said.
AT&T shares sank 9.2 percent (T:US) in January and February, the worst start to a year since 2010, as the carrier faced increased price competition in the mobile market. The drop pushed the dividend payout to the highest among the 30 stocks in the Dow Jones Industrial Average.
The average yield of stocks in the Standard & Poor’s 500 Index is about 1.9 percent, while 10-year Treasuries (USGG10YR) have paid an average of 2.52 percent in the past year.
“One of the most appealing aspects of AT&T’s total return (T:US) is that it has a very high dividend component,” said William Ferer, a money manager and director of research at Jersey City, New Jersey-based W.H. Reaves & Co. His firm manages $3 billion, including AT&T shares.
AT&T shares rose 0.5 percent to $34.46, pushing the stock’s gain this month to 7.9 percent. The company boosted its airwaves -- the frequencies that let devices make calls and download data -- by closing a $1.2 billion purchase of Leap Wireless International Inc.
Carriers have been bulking up to meet rising demand for data transmission at the same time that competition on prices has intensified. AT&T and T-Mobile US Inc. (TMUS:US) ran back-and-forth attack ads this year and offered $450 in credit to entice users to switch providers.
Chief Financial Officer John Stephens has “stressed the importance of network quality over price, which is likely why we have continued to see low churn,” Joseph Mastrogiovanni, an analyst at Credit Suisse Group AG, wrote in a March 18 note, referring to the rate of customer turnover. He rates the shares outperform, the equivalent of buy.
T-Mobile has still made absolute gains in customers. It said it added 869,000 wireless users in the fourth quarter, more than the 566,000 AT&T said it had signed up for the same period.
“T-Mobile has been very aggressive in positioning with new prices and new plans and consumers have rewarded that,” Roger Entner, an analyst at Recon Analytics LLC in Dedham, Massachusetts, said by phone March 21. “T-Mobile is growing roughly almost as fast as Verizon and AT&T. That should scare AT&T investors.”
Alissa Stewart, an AT&T spokeswoman, declined to comment on the company’s stock option activity.
The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), rose 0.8 percent to 15.12 at 9:52 a.m. in New York. Europe’s VStoxx Index gained 7 percent to 18.39.
Puts betting on a 10 percent decline in AT&T stock cost 2.65 points more than calls predicting a 10 percent rise on March 21, according to three-month data compiled by Bloomberg on the price relationship known as skew. Bullish contracts surged to the most expensive level since July 2007 relative to bearish ones on Feb. 28.
AT&T’s Cingular Wireless LLC secured a deal in January of 2007 to be the exclusive provider for the iPhone. The smartphone first went on sale in June of that year, and AT&T sales in the quarter ending September 2007 nearly doubled from the year-earlier period to $30.1 billion.
Demand for bearish bets on AT&T has declined this year. There are 74 puts for every 100 calls on the stock, compared with a ratio (T:US) of 1-to-1 at the beginning of the year, according to data compiled by Bloomberg. The current put-call ratio is near the lowest level since 2012.
Among the 10 most-owned (T:US) AT&T options, eight were bullish. January 2015 $40 calls, with an exercise price 17 percent above the close on March 21, had the highest open interest, followed by $35 calls expiring in the same month, the data show.
“The explanation for the downtrend in skew is a combination of fundamental attractiveness in the stock and a yield play,” Condodina said. “Effectively, there’s an implied floor in the stock, which makes the puts less valuable.”
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