By Tim McLaughlin and Ross Kerber
BOSTON (Reuters) - Many actively managed U.S. mutual funds were cool toward AT&T Inc (NYSE:T) even before the telecom giant's planned $85.4 billion acquisition of Time Warner Inc (NYSE:TWX).
The chilly attitude from professional stock pickers partly explains the lackluster reception for AT&T's planned takeover of Time Warner.
Large-cap growth funds, for example, prefer tech companies whose operations require less capital than a regulated telecom operator like AT&T.
Even a major benefit to owning AT&T - its juicy 5 percent-plus dividend yield - is a cause for investor concern as higher interest rates may make the return look less attractive.
“There will be more options available for other, higher-yielding assets if rates are going up,” said Carrie Tallman, director of research at Parsec Financial, a North Carolina financial adviser that owns shares of AT&T and Time Warner.
Approval of AT&T's proposed takeover has provoked broad skepticism as the deal faces some of the toughest regulatory scrutiny in recent U.S. history of mergers and acquisitions.
"We are committed to our dividend and to maintaining the financial flexibility for the board to consider future growth in the dividend," AT&T spokeswoman Emily Edmonds said in email. “On Saturday we announced we’ll increase our quarterly dividend for the 33rd straight year, even as we announced we’ve secured a $40 billion bridge facility to finance our acquisition of Time Warner.”
HUNT FOR YIELD
Meanwhile, seven out of AT&T's 10 largest fund investors are passive index funds, which are obligated to buy the stock because they track the S&P 500 Index, or other benchmarks that count AT&T as a component.
Overall, more than 600 index funds own nearly 13 percent of AT&T's shares, according to Thomson Reuters data. That is more than actively managed income, value and growth funds combined, which hold about 8 percent of AT&T shares.
By contrast, those types of actively managed funds hold nearly 18 percent of the shares of rival Verizon Communications Inc (NYSE:VZ), according to Thomson Reuters data.
Large-cap growth portfolio managers like Fidelity Contrafund's Will Danoff see AT&T as a regulated, capital intensive, slow growth company. Danoff, who oversees about $109 billion for the fund, does not own any AT&T shares, telling investors in recent commentary he has largely avoided telecom stocks.
Only 21 out of 181 large-cap growth funds tracked by Lipper Inc held AT&T shares. During the first half of this year, not owning AT&T hurt these funds' relative performance to the S&P 500 because the stock surged 26 percent.
Retail investors piled into AT&T as the hunt for yield intensified against a backdrop of historically low interest rates. AT&T's current dividend yield is 5.3 percent on an annualized basis.
Matthew Benkendorf, chief investment officer of Vontobel Asset Management, a subadviser to Virtus mutual funds, said low rates have undoubtedly driven increased interest in stocks like AT&T.
But in recent months, as higher U.S. interest rates appear more likely, AT&T shares have been under pressure. The stock is off 14 percent in the past three months, reflecting interest rate concerns and Saturday's announcement of the Time Warner deal.
Questions for investors now include whether Time Warner's TV and film assets can deliver meaningful growth for AT&T, and whether the new conglomerate will continue to satisfy an important base of investors with a healthy dividend payout.
Vontobel's Benkendorf said an added wrinkle to those questions is the sustainability of the dividend AT&T is paying. "That is a real question for them," he said.