Regional Bells aren't all worth investing in


What a difference a decade makes.

When American Telephone & Telegraph was broken up, each day I'd respond to dozens of shareholders who'd buttonhole me to ask which of the regional Bells to keep and which to sell.

I'd point out the individual nature of each of the seven regionals, such as the size of its particular customer base. Then I'd add that a conservative investor would do fine no matter which ones he kept.

Fortunately, that's just how it turned out. But while baby Bells were created equal, their individual strategies today are unique.

The collapsed $33 billion Bell Atlantic acquisition of cable operator Tele-Communications Inc. represented the boldest move into new communications businesses. Some regionals are adventurers, others stick to their knitting. Their average dividend yield is about 4.5 percent but an investor must look beyond that to examine each in light of its goals.

"Those dogs? I don't even want to talk about regional Bells," laughed Michael Elling, analyst with Oppenheimer & Co., making a joke but obviously expressing qualms about the divergent strategies.

"Their regional monopoly positions will last another three years, then they'll face the problem of becoming national and %o international entities even though their histories have been regional," he said.

Some folks are angry about the new "swinging" nature.

"The Bells are regulated utilities whose investors are seeking safety of principal, but their chief executives would rather be heads of high-flying conglomerates," complained Gary Hovis, analyst with Argus Research Corp. "Telephone service or cellular service is fine, but the riskier entry into cable is hardly a good idea."

The real reason the Bell Atlantic deal fell apart, Hovis contends, is because Chairman Raymond W. Smith stated that, to conserve cash, he might have to cut or omit the dividend. He basically forgot Bell Atlantic was a telephone company.

Others see potential.

"Interest rate fears continue to hurt regional Bells because of their image as dividend stocks, but long-term opportunities involve their multimedia potential," said Paul Aran, analyst with Bear Stearns. "Rather than being strictly for yield-oriented players, they're for those that like both dividend yield and the added entertainment spin."

If people want an "information superhighway" and are willing to pay for it, regional Bells are one of the places an investor should be, Aran believes.

"I'm focusing on regional Bells with rural demographics that won't be affected as much by competition," explained Guy Woodlief, analyst with Dean Witter Reynolds. "I like those with a large portion of revenues from nontelephone operations and with the lowest cost structures."

Ameritech Corp., the holding company for Illinois, Indiana, Michigan, Ohio and Wisconsin, which has the lowest cost structure and strongest local phone business, is recommended by Aran and Woodlief.

Elling isn't picking any Bells, but deems Ameritech the best-positioned.

Hovis would sell because earnings growth has slowed. Ameritech wants regulators to permit it to enter the long-distance market, in return for letting competitors use its network to service local customers.

Southwestern Bell Corp., which owns 10 percent of Telefonos de Mexico, has a partnership with Cox Cable to provide multimedia services and is holding company for Arkansas, Kansas, Missouri, Oklahoma and Texas, is a pick of Aran and Woodlief. Hovis rates it a hold. Owning cable systems near Washington, D.C., and boasting strong cellular operations, Southwestern Bell derives fewer profits from telephone services than other Bells.

Bell Atlantic Corp., providing service in Delaware, Maryland, New Jersey, Virginia, West Virginia and Washington, is a selection of Aran and Woodlief. Hovis rates it a hold. While its TCI deal didn't fly, it still has plans to introduce video services in its region. It gets along well with regulators.

U.S. West Inc., with a 25.5 percent stake in Time Warner Entertainment and telephone service in 14 western states, is recommended by Hovis because of its aggressive actions in Eastern Europe, as well as above-average earnings and growth. Small populations in its states means less competition.

Remaining Bells receive hold ratings, though Hovis would sell Nynex Corp. due to weak growth in earnings and dividends and unload Pacific Telesis Group because of its desire to buy cable firms.

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