AT&T Vs Verizon: The Telecom Battleground

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Mar 13, 2015
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Telecom Services is the smallest sector of the S&P 500 index with merely 5 companies, but it is also the most rapidly evolving industry. The five companies comprising this sector are primarily associated to the segment of low to moderate growth with high dividend yield. However, in contrast to the utility sector, the exception of these two mainstays, Verizon Communication (VZ, Financial) network and AT&T (T, Financial), S&P 500 telecom Services Company lacks the stability and consistency of growth in earnings and dividends more commonly seen in the utilities sector.

It is evident that the investors need to examine the past and current dividend yields and more closely into the pillars of each constituent. A high current yield has no value if it is unreliable and unsustainable. These attributes are the fundamentals of profitability and smooth functioning of a particular company. This will decide how well a company can perform as a business in future.

The Telecom Service Sector

This sector contributes just over 2% of the S&P 500 index. Hence, it is one of the least important components. Both AT&T and Verizon provides fixed-line and wireless telecommunication network for voice, text and high density data. These are the two premier companies in S&P 500 telecom services sector. Both these companies are prospective high current dividend yields and recognised prominence in the industry. They have a good command over investor’s portfolios seeking immediate income.

If we look at the investment based evaluation, we can look at future returns with both the companies. Although there are various similarities as well as differences between these two iconic telecom brands, both the companies appear fairly valued. AT&T offers a higher current yield with moderate valuation. Investors need to keep lower expectation for and dividend growth as compared to Verizon Communications. Consequently, a classic battle between growth, yield and valuation has been consistent between the two companies. It is quite surprising that the calculation might come up with higher yield and lower valuation.

AT&T and Verizon Analysis

For 2015, AT&T expects to continue cumulative revenue growth. The EPS growth will continue to be in the low single digit range, improving fee cash flow and dividend coverage. The capital expenditure will range closer to $18 billion. AT&T has recently made several capital-allocation decisions, which includes major steps like acquiring DirecTV and substantial capital spent at the AWS-3 spectrum auction. AT&T encompasses a large number of residential and business customers. The upgrades enable them to offer better services to its customers and drive revenue growth.

AT&T and Verizon are big players in the US wireless industry. The wireless business should generate remarkable profit and the DirecTV acquisition will make AT&T a giant in television industry.

Verizon Communication INC, through its subsidiaries provides communication, information and entertainment products and services to consumers, businesses and government agencies worldwide. It also offers voice and data services such as conferencing, contact centre solutions and private lines and data access networks. The company was formerly known as Bell Atlantic Corporation. Acquiring 100% of Verizon Wireless enabled them to create better packages for its customer base. It is performing well but the maintenance cost has gone up to $10 billion in 2014. Spending on spectrum will impact returns on the capital.

Investor’s Take

The investors need to pay a very close attention to each company’s balance sheets, debt level and overall product presentation. In prevailing low interest rate environment, both of these companies are offering attractive current dividend yields and prospects for low double digit annual returns. Comprehensive research is highly recommended by the analysts and researchers.

The assumption are that the future potential return of AT&T with its high dividend yield and lower current valuation sums up to 11.53% per annum where as Verizon with its higher growth rate and lower dividend yield sums up to 11.24% per annum. It gives an advantage to AT&T over Verizon. However, in most instances numbers are close enough to be called a tie.