Verizon & AT&T: Wireless Giants Headed In Different Directions by Ben Reynolds
AT&T (T) and Verizon (VZ) are the two largest wireless businesses in the United States. They are both mega cap businesses:
- $265 billion market cap for AT&T
- $219 billion market cap for Verizon
These two giants each control 33% of the United States wireless market measured by number of subscribers. Together, these two companies account for two-thirds of wireless subscriptions in the United States.
That’s powerful. Verizon and AT&T, along with T-Mobile (TMUS) and Sprint (S) control over 90% of the wireless market in the United States.
Stability & Dividends
Both businesses make the bulk of their profits from contracts that reduce customer churn by increasing switching costs. This gives both businesses very stable cash flows.
Stability allows these companies to pay steady or rising dividends year after year.
Verizon is not a Dividend Aristocrat, but the company does have a long dividend history. Verizon has paid steady or increasing dividends every year for 33 years.
In addition to their long dividend streaks, both companies are very shareholder friendly in that they pay out the bulk of their profits as dividends.
- AT&T has a payout ratio of 82.2%
- Verizon has payout ratio of 63.8%
These high payout ratios (combined with fairly low price-to-earnings ratios) lead to high dividend yields – a rarity in today’s low interest rate environment:
- AT&T has a 4.5% dividend yield
- Verizon has a 4.2% dividend yield
For comparison, the S&P 500 currently has a dividend yield of 2.0%. Both Verizon and AT&T have dividend yields that are more than double the market average.
The combination of stability and high (and growing) dividends make AT&T and Verizon some of the best stocks to own for retirement.
While these businesses are stable, they are far from inactive. Both AT&T and Verizon have gone on an acquisition spree.
Verizon & AT&T: Acquisitions Galore
Neither Verizon or AT&T are content with ‘staying pat’ in the slow growing wireless space. Both companies have made big bets on recent acquisitions,
Verizon’s recent acquisition history is below:
- $4.4 billion for AOL
- $4.8 billion for Yahoo! (YHOO)
- $2.4 billion for Fleetmatics (a GPS tracking / vehicle software company)
- Undisclosed amount for Telogis (a connected vehicle company)
- Undisclosed amount for Complex (a pop culture site)
- Unisclosed amount for Volicon (digital video archiving, monitoring, and creation)
That’s $11.6 billion in disclosed acquisitions, plus more for the undisclosed acquisitions. It is likely that the 3 undisclosed acquisitions were in the millions, not billions.
Verizon’s acquisition pace has been dizzying. AT&T has made several big moves over the last few years of its own.
- $2.5 billion for Lusacell
- $1.9 billion for Nextel Mexico
- $63.0 billion for DirecTV
- Undisclosed amount for Quickplay Media (Over-The-Top video provider)
There is a difference in the type of acquisitions these two companies have made over the last few years. The different types of acquisitions underscore the different growth strategies for the two wireless giants.
AT&T & Verizon: Headed In Different Directions
Verizon’s acquisitions show the company is focusing on two trends:
- Mobile advertising
- Internet of things (especially in vehicles)
The AOL, Yahoo, and Complex acquisitions all bolster Verizon’s growing content empire. The company is monetizing these properties through advertising.
They also give Verizon access to a tremendous amount of data on the usage patterns and habits of its subscribers. Verizon is trying to expand from a wireless provider to a wireless and content provider.
The company is also betting big on the ‘internet of things’. The idea behind the internet of things is that more and more everyday devices will be connected to the internet.
This will allow companies to collect data on the usage of a wide range of devices and improve them to better match what consumers want.
A company like Verizon could conceivably manage the data from one of their customers and serve ads on their media properties based on behavior in your house. Use your toaster every morning? Get served an ad for pop tarts. Did one of your light bulbs go out? Get served an ad for a new light.
AT&T has taken a different approach.
What immediately stands out is the company’s gigantic $60 billion acquisition of DirecTV. The DirecTV acquisition is already paying off for AT&T. Adjusted earnings-per-share grew 6.7% in the company’s latest quarter.
DirecTV has a significant reach in Latin America. AT&T has also acquired Lucasell and Nextel Mexico to expand its wireless operations into Mexico.
The geographic expansion into Mexico makes sense. It keeps AT&T focused on what it does best while opening up a new market for the company to expand.
Bundling the subscription based DirecTV service with AT&T’s other subscription offerings makes sense as well. It is a logical add-on for the company. Additionally, AT&T plans to leverage DirecTV’s video services by streaming on mobile devices.
In short, Verizon is betting big data, mobile advertising and streaming, and the internet of things. AT&T is betting big on Latin America (especially Mexico) and providing mobile streaming with DirecTV.
Valuation & Final Thoughts
Both AT&T and Verizon are high quality dividend growth stocks. Both have long histories of paying increasing dividends. Both are consistently high paying dividend stocks with growth potential – a rarity in today’s low interest rate environment.
Both AT&T and Verizon rank in the top one third of dividend growth stocks using The 8 Rules of Dividend Investing due to their stability, high yields, and reasonable valuations:
- Verizon has a forward price-to-earnings ratio of 13.3
- AT&T has a forward price-to-earnings ratio of 14.2
AT&T and Verizon both have low forward price-to-earnings ratios. The companies have lower price-to-earnings ratios due to their lower historical growth. Both companies are likely trading around fair value at current prices.
The company’s offerings closely match each other today. Verizon and AT&T are slowly heading in different directions, however.
Despite this, both companies will likely continue to deliver positive earnings-per-share growth and dividend growth for investors over the long run.