- AT&T Inc. and Verizon Communications Inc. are 2 massive telecom service companies that offer steady dividends.
- Both stocks have significantly outperformed the S&P over the last 12 months.
- With positive synergies from the DirecTV acquisition, I don't think we will see AT&T stock fall back down to the low $30s again.
AT&T (NYSE:T) and Verizon (NYSE:VZ) are two telecom leaders that have gained a lot of investor interest in the last year. As you can see below, both AT&T stock as well as Verizon stock, have significantly outperformed the S&P 500 over the last 12 months, with AT&T stock having a better year with a return of 18.7%. Both companies have a lot to offer to income investors looking for stability with some modest growth.
Most investors are going to be drawn to these 2 stocks as income plays. AT&T currently has a yield of 4.80% compared to Verizon’s 4.13%. As you can see from the chart below, both companies have been consistent in increasing their dividends. While AT&T is offering the better yield, an argument can be made that Verizon’s dividend is slightly more stable as they have a payout ratio of only 47.75% compared to AT&T’s 77.02% for the TTM (Trailing Twelve Months) period. However, both companies have very volatile payout ratios if you look historically, but it doesn’t affect income investors because they never disappoint on their dividends. What is also important to note here is free cash flow, as both companies have been making some pretty large investments with costly acquisitions. Both companies have shown steady performance on their bottom line and are posting fairly similar results in FCF. Basically, either company offers a solid and reliable dividend.
Acquisitions and Growth
AT&T’s recent purchase of DirecTV cost a staggering $48.5 billion while Verizon dropped $4.4 billion on a less exciting acquisition of AOL. Of course, Verizon’s biggest purchase was their $130 billion deal buying Vodafone’s 45% stake in Verizon Wireless 2 years ago. Both companies are well aware that they have to put time and resources into growing their businesses vertically so as to avoid the headaches of antitrust laws. I like AT&T’s acquisition of DirecTV and think the revenue diversification is going to provide quick accretion and will increase shareholder value over the long-term. It is also a good way for them to piggyback on DirecTV’s exposure to foreign markets, notably Latin America, where they can build out their core business as well.
Verizon trades at a more modest PE of 12.4 compared to AT&T’s 16.7. At a glance, AT&T looks pricier, but they are actually trading at a price to FCF of 14, compared to Verizon’s 19.72, which is actually a bigger discrepancy between the 2 companies than their PE ratios. Both companies have similar growth rates, but I think AT&T can grow into and beyond their current PE as they anticipate $2.5 billion or more per year in savings, by the third year, from the DirecTV merger. You’re getting a fair price on either of these companies right now as they are valued similarly.
AT&T and Verizon are two telecom service companies priced fairly for investors. If I had to make a choice between the 2, I would give the edge to AT&T stock. It has the higher yield, more interesting acquisition, and I don’t see it ever coming back down into the low $30s again. If the synergies from the DirecTV merger prove to be as successful as expected, then the increases in future cash flows can provide capital for increased dividends or buybacks. Either way, shareholders should be happy.