Hey WSJ: What About Those Lead Cables?

Predictably, sensationalist claims are headed down the memory hole.

Remember the Wall Street Journal’s summer “revelations” about telecom companies owning 2,000 plus miles of lead-encased cables, supposedly poisoning unsuspecting Americans for decades? 

You’d be forgiven for saying no. There hasn’t been a peep about it from nation’s leading investment news organization for months. Nor was there much response to AT&T Inc CEO John Stankey’s recent charge that WSJ was “over-writing their headlines.” But the fact the Journal and its Dow Jones & Co affiliates are trying to pretend the story never happened makes it all the more important for we investors to remember.

Let’s revisit the facts of the case. In a series of feature articles this summer, WSJ stated its reporters had visited “about 300 cable sites” in the US and collected “roughly 200 environmental samples” at “nearly 130” of those sites. It claimed “roughly 80 percent” of sediment samples taken next to underwater cables showed “elevated” levels of lead. And reporters went on to quote statements from medical professionals that “no amount of lead is safe,” essentially equating telecoms’ situation with the asbestos exposure case that bankrupted the former Manville.

The Journal went on to charge that telecom companies have known about the dangers of their lead-encased telecommunications cables for decades, and that they intentionally did nothing to reduce the public health hazard. That equated telecoms to tobacco sellers of decades past. And they cited “testimonials” allegedly from former employees implying “some older metropolitan areas may still have over 50 percent lead cable.”

Not surprisingly, these charges published in such a widely read and respected publication triggered a sharp selloff in big communications stocks last summer. And caught basically flat-footed, sector analysts scrambled to catch up by issuing “estimates” of potential financial liability that would match the magnitude of the charges.

A few days after the articles posted, Bloomberg Intelligence reported an average Wall Street estimate of $43 billion for the clean up alone of lead cables. And they projected a potential liability multiples higher stemming from lawsuits filed by the public and especially employees, with litigation lasting “at least 5 to 10 years.”

Several prominent US politicians also took the bait, demanding investigation and action from the Environmental Protection Agency and Federal Communications Commission. And a swarm of so-called “shareholder advocacy” law firms started circling, alleging “securities fraud” on the part of management by not owning up to “potentially significant litigation risk, regulatory risk and reputational harm as a result of ownership of lead cables.”

Then a funny thing happened. The actual facts of the case started to come out and the story unraveled fast. First, it became clear that there were far fewer actual lead-encased cables than WSJ reporters had charged—which stands to reason as pre-1984 breakup AT&T had stopped encasing cables with lead in the 1950s, and by the 70s was taking them out. And to the extent lead is used as a fire retardant for cables, its not accessible by the public.

Immediately following this reveal, Wall Street estimates of potential liability began falling rapidly. Within a couple weeks, the highest estimates of lead cable liability for the supposedly most exposed company AT&T Inc (NYSE: T) were down to a few hundred million. And by the time Q3 results were released last month, concerns had faded completely. In fact, the subject came up not once during Verizon Communications’ (NYSE: VZ) earnings call.

How did WSJ get it so wrong? For one thing, their reporters apparently didn’t have the expertise—and very likely the time and resources—to do the actual investigative work. Instead, as I pointed out in my July 23 Dividends with Roger Conrad post “Verizon, AT&T and the Lead Cables Controversy,” they relied on a third party Marine Taxonomic Services,” a company that does work for plaintiff lawyers in environmental suits including the Environmental Defense Fund.

You can’t blame a professional advocate for painting an incredibly misleading picture of telecoms’ liability. After all, in our legal system, these people are highly motivated to put telecoms in as bad a light as possible. That’s how you sway the court of public opinion in your favor, and maximize potential jury awards from cash-rich corporations. 

You can blame WSJ—the reporters for not doing their homework and the editors and publishers for deciding to go with the story under the flashiest headlines. But at the end of the day, modern media giants have every motivation to do what it takes to get your attention. And by that measure, the telecoms’ lead cables story was probably one of their greatest successes this year.

The losers are, of course, the investors who read and trusted the story because it was the WSJ—and as a result wound up selling stocks they may have owned decades at bear market low points.

On July 18, just after the WSJ posted the lead cables story, AT&T sank to $13.43 a share, its lowest price since the early 1990s. Verizon kept sliding to a low of $30.14 on October 6. But since then, the pair have rebounded by 25 percent and 28 percent, respectively, while Verizon raised its dividend.

Despite strong Q3 results and reiterated guidance at both companies, that’s still probably not enough of a rebound to convince many investors to come back in. In fact, having been so badly burned, it’s likely some never will. But considering the shaky state of the overall stock market, the telecoms’ rebound is impressive and portends more gains ahead.

Unfortunately, this won’t be the last time the big investment media opts for hyperbole over substance—just as the mainstream media in general does routinely. And investors who can’t put the emotions of a falling market aside long enough to think critically will get burned again.

Similarly, media’s push for bigger headlines elevates risk investors will ignore the most important stories to their wealth. One possible example is a page 18 article in Friday’s Washington Post, highlighting a proposed EPA rule to require water utilities to remove all lead pipes within 10 years.

That decision is projected to cost anywhere from $45 to $60 billion, versus the $15 billion available in federal assistance from the 2021 Infrastructure act. And it means thousands of smaller water systems—as well as many large municipally owned utilities—won’t be able to bear the burden without a customer revolt.

That’s very bad news for a lot of municipal bondholders. But there’s also opportunity: The threat of default may break the current regulatory/legal logjam that’s delayed acquisitions by investor owned companies like Essential Utilities (NYSE: WTRG). These utilities are already replacing millions of dollars of pipe each year, increasing earnings from the investment. And accelerating acquisitions would give profits and share prices an even bigger boost in years to come.