Brentview News & Insights

Brentview's James Boothe Discusses AT&T in U.S. News

Aug 12, 2020 2:19:40 PM

AT&T (TICKER: T) and Verizon Communications (VZ) are the two most dominant telecommunications companies in the U.S.

Operating in one of the few truly oligopolistic industries in the country, the only other rival even in the same ballpark as AT&T or Verizon is T-Mobile US (TMUS), which had to gobble up Sprint just to approach the scale of these two blue-chip giants.

In a one-on-one matchup, which is the better buy? Verizon or AT&T stock?

For investors debating the AT&T vs. Verizon question, here's a quick rundown of each business, and a glimpse into expert opinion on the topic.


AT&T Stock

Market capitalization: $216 billion
Dividend yield: 6.9%

There's no beating around the bush with AT&T: It's a titan of American industry with roots that go back 144 years to Alexander Graham Bell and the telephone itself.

It's the single-largest communications company in the world by revenue. Its massive dividend yield is not only an order of magnitude higher than the lowly 10-year Treasury yield, but AT&T has been increasing its quarterly dividend payout annually for the last 35 years, making it a member of that rarefied class of stocks known as the S&P 500 dividend aristocrats.

But let's get to what most sets AT&T stock apart from Verizon: AT&T's media business. Specifically, the company acquired Time Warner in an $85 billion deal in 2018, diversifying its revenue streams as it added Warner Bros., HBO and Turner to its portfolio overnight. Some of the brands under its umbrella include CNN, DC Entertainment, Cinemax and TNT, among other assets.

The biggest difference between AT&T and Verizon is "AT&T's strategy of focusing on building out its media segment to make the entire AT&T universe more attractive, through Time Warner and, more specifically, through HBO," says Jeffrey Bilsky, portfolio manager and senior analyst at Chartwell Investment Partners.

"So far, this strategy has not paid off for AT&T as media, in general, is disliked in the market right now, and it has not helped stop continued large losses from AT&T's video subscribers," Bilsky says.

It's not all bad, though, says James Boothe, chief investment officer at Brentview Investment Management. AT&T is part of the dividend manager's portfolio.

"AT&T has a great combination of an attractive dividend yield coupled with a fairly cheap valuation. The dividend yield is up around 7% and the stock trades around nine times forward earnings. Although top-line growth isn't stellar, it's the ability to generate free cash flow that sets AT&T apart. From 2015 to 2019, free cash flow nearly doubled on revenues growing at midsingle digits," Boothe says.

There's another catalyst that could make AT&T shares a better pick than Verizon stock this year. That's despite a 23% year-to-date decline for T against just a 4% year-to-date loss for VZ at the time of this writing.

"I believe AT&T is attractive here because consensus estimates are not factoring in the potential for HBO Max to drive better video subscription net adds, and while investors may be correct not including this in their estimates, the risk/reward is compelling, with a turnaround in video subs almost a free option on the stock," Bilsky says.

After seeing the ravenous adoption of Walt Disney's (DIS) Disney+ streaming platform – it added around 60 million subscribers in its first eight months – it's true that now may not be the best time to bet against streaming platforms with quality content.


Verizon Stock

Market capitalization: $242 billion
Dividend yield: 4.2%

While AT&T has more than a few things going for it, Verizon is no slouch itself, and the market believes Verizon is more valuable than AT&T. Despite trailing revenue around $130 billion for VZ versus $175 billion for AT&T, Verizon boasts higher margins, taking in $19.15 billion in profit to AT&T's $11.9 billion.

"Verizon's business is almost entirely wireless, and it has benefited from the stability of that earnings stream," says Sam Hendel, president of Levin Easterly Partners. "Wireless is one of the last bills that a consumer will stop paying when under financial duress; we saw that during the 2008-2009 Great Recession and have continued to see that stability during (the pandemic)."

As for its rival, "AT&T's business mix is approximately 50% wireless, and it is significantly more exposed" to pandemic-induced weaknesses, Hendel says. For example, its DirecTV division has been struggling, and the company is more vulnerable to cord-cutting, production stoppages and anemic advertising budgets.

Verizon has instead opted to focus on its core business and hold off on dramatic diversification initiatives.

"Verizon has chosen to emphasize its millimeter wave technology to try and be the premier 5G offering, while using third-party partnerships like Disney+ and Apple Music to lower customer churn," Bilsky says.

And while VZ shares don't boast the chart-topping dividend or the dividend aristocrat status that T stock does, a 4.2% yield is still nothing to scoff at, and a track record of 14 consecutive annual dividend increases is still rather impressive.

Verizon also seems well-positioned to benefit from the looming shift to 5G technology, with the highest ownership of the spectrum bands needed to deliver dramatically improved download speeds and bandwidth.

Plus, its business is chugging along nicely, even in the tumultuous environment of 2020. Earnings per share in the second quarter rose to $1.13 from 95 cents in the same quarter last year.

Cash flow from operations, an important metric in this industry, also rose by $7.7 billion to $23.6 billion in the first half of 2020.


Bottom Line

Neither company is likely to go anywhere anytime soon, and these two telecom giants each have characteristics that might appeal to longer-term income investors focused on stability. Both stocks have their selling points.

"Both should benefit from 5G as early evidence has shown customers are willing to upgrade their mobile plans for faster and more unlimited internet. Additionally, both stocks are trading at historical discounts relative to the overall market price-earnings ratio and comparing their dividend yields to the 10-year bond," Bilsky says.

That said, some of the calculus surrounding these two names may have to do with an investor's timeline, as well as their outlook on the state of the world.

"Verizon's stock naturally has held up much better during the pandemic and likely will continue to do so in a continuation of that environment. However, AT&T has more upside to a recovery in economic growth and a resumption of normal life with the return of film slates, advertising dollars, studio production and increased consumer discretionary spend," Hendel says.

If you're looking at sheer stability and momentum, Verizon stock seems to have the upper hand, while AT&T arguably has a slightly higher risk – as well as a potential catalyst – in its media and entertainment holdings.


Source Publication: U.S. News
By: John Divine

Recent Insights

Receive Our Insights