It’s a longtime investing adage that telecom stocks are a good defensive play during a recession. The family telephone is essential, conventional wisdom holds, so consumers will pay their phone bills in good times and bad.

But investors got a bit of nasty surprise last week when telecommunications shares saw a market-wide decline after AT&T Inc. (T) Chief Executive Officer Randall Stephenson acknowledged weakness in the phone giant’s residential sales. According to Stephenson, consumers were hanging up their telephone service as they tightened their belts because of their concerns about the economy.

"We’re really experiencing softness on the consumer side of the house from the economy," Stephenson said speaking at Citigroup’s Entertainment, Media, and Telecom Conference.

The AT&T chief’s comments dialed up worries that the much-feared U.S. recession has already arrived: If consumers are disconnecting their landlines, they must really be feeling the pinch. And that would be terrible news for an economy in which consumer spending accounts for 60% of gross domestic product.

But some other experts now suspect AT&T may be engaged in the equivalent of a stock-market misdirection: While the former Ma Bell is blaming the economy for its problems, it’s actually trying to keep investors from spotting its slipping competitiveness and then dialing 911.

Annabel Z. Dodd, professor and author of The Essential Guide to Telecommunications, feels there are three reasons for a decline in traditional landline service.

First, the use of mobile phones is on the rise: "Landlines are more and more irrelevant," Dodd said in a telephone interview with Money Morning.  When mobile phones were first introduced, many people maintained a landline as a safety precaution.  But as cell phone coverage improves and indoor reception quality increases, consumers are dropping their landlines in favor of their mobile phone.

Second, competition is escalating: "Prices [on landline services] have dropped.  It’s not as profitable to push or innovate these services," Dodd said.  Large phone companies like AT&T make higher profits on business customers.  At the same time, cable companies have entered the market, luring customers away with bundled service deals that include what telecom firms are billing as the "triple play – voice, cable and Internet.

Third, as happens with each passing generation, consumers are changing the way they socialize: "Online social networks like Facebook, MySpace, and on the business side, LinkedIn, are changing the way we communicate with others," said Dodd.  The days of a teenager spending hours on the phone have passed.  Email and instant message chat programs have become the norm.  Teens still want cell phones, but increasingly they are using those phones to send text messages, not make phone calls.  Younger workers prefer to win new clients through the computer, rather than cold calling.

Dodd only sees the trend of declining landline sales continuing in the future. People’s desire for mobility will cross over into other industries. More laptops are already being sold than desktop computers, and she sees that sales trend eventually shifting to highly mobile PCs. 

"People don’t want to be tethered," she said. 

News and Related Story Links:

• Annabel Dodd’s Website:
  Dodd on the Line

• Amazon.com:
  The Essential Guide to Telecommunications

• Forbes:
  AT&T Could Indicate Recession

• Bloomberg:
  AT&T Drops Most in 5 Years on Consumer ‘Softness’

U.S. telecom giant AT&T Inc. (T), looking to expand its network into the fast-growing markets of the Middle East and Southeast Asia, may buy an unspecified stake in the wireless unit of Telekom Malaysia Berhad (PINK: MYTEF) to help do so.

The potential move by AT&T once again illustrates the so-called "Global Titans" investment strategy that Money Morning experts have chronicled time and again: By investing in U.S.-based companies that are aggressively pursuing growth in the fastest-growing overseas markets, U.S. investors can profit from that foreign-market growth while still enjoying the relative safety provided by the stricter regulatory protections afforded by the U.S. financial markets.

Potential Deal Drivers

According to reports by both Forbes.com and The Malaysian Reserve, AT&T wants to buy into TM International SDN BHD, the mobile unit of the state-run Telekom Malaysia. The Malaysian business daily newspaper and the noted U.S. business magazine said that TM International has been "keen" to break into the fast-growing Vietnam market, and has been hunting for a strategic partner that can help make that happen.

AT&T – the largest U.S. phone company – is a front-runner, thanks to its deep pockets, and an existing presence in Vietnam. Telekom Malaysia would neither confirm nor deny the report, which was based on unnamed sources and first appeared in the Malaysian daily on Wednesday.

"Telekom Malaysia wishes to inform that it does not comment on any news that is speculative in nature," the telecommunications firm said in a statement.

Saudi Arabia’s second-largest wireless carrier, Etihad Etisalat Co. [better-known as Mobily], is expected to be another suitor for the mobile business of Telekom Malaysia; in December, Mobily agreed to purchase a stake in TM’s Indonesian unit.

Mobily’s main shareholder is Etisalat of the United Arab Emirates, which owns a 35% stake. The Dubai-based Etisalat has been a highly acquisitive company.

If AT&T pulls off the deal, it would give the U.S. telecommunications firm an entrée into some of Asia’s best regional markets, including Sri Lanka, Bangladesh, Pakistan, Indonesia, Singapore, Thailand and Cambodia, Forbes.com reported.

The Take on Telekom Malaysia

It was back in September that Telekom Malaysia unveiled plans to spin off its wireless business into the separately listed TM International – a business unit valued at $8.4 billion. The plan included its domestic Celcom BHD unit, and operations in nine other countries. The deal – termed a "de-merger" – was supposed to facilitate the sale of the wireless unit to strategic foreign investors.

Several foreign wireless phone firms have reportedly approached the Malaysian parent firm since the de-merger deal was unveiled. Last November, Telekom Malaysia denied a report that Great Britain’s Vodafone Group PLC (VOD) had agreed to buy a 25% stake in TM International.

As currently planned, TM International shares will trade on the Bursa Malaysia BHD (PINK: BSAMF) – the main board of the exchange in Kuala Lumpur – while the remaining businesses, including the fixed-line voice, data and broadband services, will remain listed as Telekom Malaysia.

Telekom Malaysia expects the spin-off to be finalized by the conclusion of the second quarter.

News and Related Story Links:

• Forbes.com:
  AT&T Reportedly Interested In Telekom Malaysia Mobile Unit.

• Money Morning News:
  Emirates Telecommunication Eyes Controlling Stake in Oman Telecommunications.

• Money Morning Investment Analysis:
  Global Memory Chip Leader SanDisk the Latest Heavyweight to Pursue Vietnam’s Promise.

• Money Morning Investment Analysis:
  Vietnam Growing at Exceptional Rate… American Investors Looking for Good Entry Point.

• Forbes.com:
  Telekom Malaysia up 10% On Mobile Spin-Off Plan.

AT&T (T) announced yesterday (Tuesday) a substantial buyback plan of 400 million shares through the end of 2009 and a 12.7% increase of its quarterly dividend to 40 cents per share.

"This latest dividend increase, combined with the new share repurchase authorization, reflects the strength of AT&T’s operations, and our board’s confidence in the future of our business and our ability to continue to deliver strong results," Board Chairman and Chief Executive Officer Randall Stephenson said in a press release. "AT&T has great assets in a growth industry, and we’re excited about the opportunities we have to continue to grow our business while also delivering value to shareowners."

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AT&T’s strong third-quarter profit growth was fueled in part by a profitable collaboration with Apple’s iPhone that added 2 million wireless subscribers for the quarter. Additionally, iPhone users are twice as likely to purchase downloads and other Web-based services, reported Bloomberg.

Stock buybacks typically have a positive effect on share price and AT&T’s announcement was no exception. AT&T rose 4.12% on the day of the announcement before closing at $39.46 per share.

Other companies to announce share buyback programs recently include:

• Newly formed Thomas Cook Group plc (TCG) announced plans to seek approval for a stock repurchase plan worth 375 million euros ($550 million) based on stronger than expected profits for its fiscal year ending October 31, 2007.   "Both our current trading and our first operating result as Thomas Cook Group plc are very encouraging," Joint Chief Executive Manny Fontenla-Novoa said in a trading update released yesterday. The company’s stock rose 6.77% for the day.

• In mid-November, Cisco Systems, Inc. (CSCO) announced a $10 billion increase in its current share repurchase program. Cisco has never paid a dividend, preferring instead to return money to shareholders through stock buybacks, Bloomberg reported.

• German automaker Daimler AG (DAI) announced the successful completion of the first stage of their stock repurchase plan representing 4.73% of outstanding shares valued at 3.48 billion euros ($5.10 billion). The buyback will resume after 2007 financial statements are verified. "In total, therefore, up to 10 percent of the outstanding shares will be bought back for up to 7.5 billion euros," the company said in a statement as Reuters reported.

News and Related Story Links:

• Bloomberg:
  AT&T Climbs Most in Almost Five Years After Dividend Increase

• MarketWatch:
  Thomas Cook shares jump as profit tops forecasts

• Bloomberg:
  Cisco Increases Stock Buyback Plans by $10 Billion

• Reuters:
  Daimler wraps first tranche of stock buyback