Dividend investors in the telecoms sector are faced with two choices: AT&T or Verizon. Verizon has the largest 4G network in the United States, covering every major metropolis and many rural areas. With more than 133 million subscribers and 32 quarters of dividend growth, Verizon is largest mobile network provider in the United States, followed closely by AT&T with 124 million mobile subscribers and 30 years of dividend growth.
Verizon’s market capitalization exceeded AT&T’s in early 2014, a historic shift comparable to Amazon outpacing Wal-Mart. AT&T, the old-guard titan of the telecom industry originally founded in 1885, was overtaken by Verizon, the almost purely mobile upstart founded just 15 years ago.
Comparing AT&T and Verizon is no easy task: the two telecom titans have similar market capitalizations, earnings, dividend yields and customer bases. They are in the same business and post similar fundamentals. Comparing AT&T and Verizon is like comparing apples to apples, and deciding between them presents a challenge for the analyst.
Q1 and Q2 Comparison Between Verizon and AT&T
Let’s look at each company’s Q1 and Q2 results to try to get a better picture of which is the better play for long-term dividend investors.
Q1 2015 total revenues for AT&T came in at $32.6 billion, down 0.3% from the previous quarter. The slight downturn was largely attributable to a fall in wireline operating income, down 3.5% year-over-year. The wired telephony market accounted for $14.1 billion of AT&T’s total Q1 2015 revenues of $32.6 billion, or close to 44%.
AT&T continued foothold in the wired telephony market (“wireline”) makes it vulnerable to the long-term shift toward mobile networks. Customers continue to “cut the cord,” and the future is gradually growing dimmer for AT&T as a wireline operator.
On the wireless side, AT&T added 1.2 million wireless subscribers in Q1 2015, including 648,000 cars. In the same quarter, Verizon posted 565,000 postpaid subscribers, an increase of 4.8% year-over-year. AT&T’s wireless revenues were up 1.8% in Q1 2015, compared to Verizon’s increase of 6.7%. Q2 2015 saw Verizon increase operating income from its wireless unit by 10.2%, up from $6.9 billion to $7.7 billion.
Strategic business services such as VPNs, cloud services, and IP conferencing offer areas of growth, and one that Verizon has not yet tapped. The diversification of AT&T’s core business in this sector seems to indicate strength. Q1 2015 saw revenues for its strategic business services unit saw revenues increase 15.4%.
Verizon offers an annual dividend distribution of $2.20, compared to AT&T’s annual distribution of $1.88. AT&T’s dividend yield stands at 5.41%, one the highest in the Dow. Verizon’s yield is slightly lower at 4.80%. Yields, of course, are a function of stock price valuations. AT&T’s yield is high precisely because it is ranked lower by the market ($34, as of this writing). Some investors may prefer AT&T at its current deflated valuation over Verizon (trading around $45, as of this writing).
AT&T has a payout ratio of 73.7%, compared to Verizon’s payout ratio of 56.3%. Verizon’s dividend is thus more sustainable, taking a lesser part of earnings-per-share. Even so, AT&T has a 30-year track record of increasing dividends regardless of minor fluctuations in earnings and there is no reason to suppose that trend will change anytime soon. AT&T even managed to increase its dividend distributions during 2008 and 2009, when many other Dow companies held distributions constant or canceled them altogether.
History matters, but smart investors don’t make decisions based purely on past performance. Verizon also managed to increase dividends throughout the financial crisis of 2008-9, and now has an 8-year record of increasing distributions. Deciding between AT&T and Verizon is largely a matter of comparing their future prospects and choosing which one has greater growth potential.
Mergers & Acquisitions
Verizon recently completed its purchase of Vodaphone’s 45% stake in the company, becoming an independent entity for the first time in its relatively short history. Since then it has initiated an acquisition of AOL in an attempt to become a content generator as well as a mobile network provider. Verizon plus AOL puts the company in a position to win on all sides: selling network access to consumers, generating content targeted at mobile users and selling ads to businesses who want to target the lucrative market of mobile users.
The completion of Verizon’s purchase of Vodaphone’s 45% stake in the company resulted in an immediate increase in earnings per share of about 10%. Since the deal was finalized in early 2014, VZ has traded in the $45 to $50 range. The purchase gave Verizon access to all of its wireless unit’s profits, which the company has said it intends to use to stay on top in the increasingly competitive North American market.
Verizon announced its acquisition of AOL in late June 2015 for $4.4 billion. The purchase gives Verizon access to AOL’s $600 million advertising revenues and online news sites such as Huffington Post, TechCrunch and Engadget. As a side note, the AOL acquisition also gives Verizon 2.1 million dial-up subscribers. To any other company these dial-up users would be a burden, but Verizon will probably try to upgrade them to its FiOS service, where possible.
In late July, the Federal Communications Commission approved AT&T’s merger with DirecTV. The two companies are planning to complete the deal by the end of Q3 2015. The DirecTV merger and AT&T’s entry into the Latin American market promises to pay off, but could also be interpreted as a retreat from the North American wireless market where Verizon retains the lead.
AT&T’s revenues are split rather evenly between the wireless and wireline markets. By comparision, only 6.5% of Verizon’s operating income in Q2 2015 came from the wireline market, mostly from its FiOS unit which represents a growth opportunity over traditional broadband where AT&T is dominant. One-third of AT&T’s wireline revenues came from its strategic business services unit; revenues from this unit were and remain strong, however, the remainder of its revenues from broadband stayed relatively stagnant.
That being said, we believe Verizon (VZ) is the stronger company with brighter prospects in the North American market. No doubt Verizon will try to expand into Latin America as AT&T is currently in the process of doing, but as a matter of choice, not necessity. AT&T’s acquisition of DirecTV and its move into Latin America is a smart strategy, but a forced one. Competition from Verizon in the mobile sector in the North American market and a declining wireline market compels AT&T to look for continued growth elsewhere.
Verizon offers higher dividends and better long-term growth prospects through ads, content generation, its FiOS unit and continued mobile subscriber growth. AT&T’s continued reliance on the wireline market for revenue forces it to find new avenues for continued growth.