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Using the Value Line Page: Comparing Verizon and AT&T - December 31, 2010
Telecommunications industry giants AT&T (T - Free AT&T Stock Report) and Verizon (VZ - Free Verizon Stock Report) are major players in the wireless business, as well as dominant forces in the traditional wireline sector in the United States. The two companies grew rapidly as a result of the industry consolidation of the middle years of the just-ended decade. SBC Communications Inc. purchased AT&T in 2005, and took the latter’s name. The company then acquired BellSouth in late 2006. Verizon, meanwhile, grew via its combinations with MCI in 2006, and Alltel in 2009. All this information is available in the Business Description of the respective companies’ Value Line report.
Despite (or perhaps because of) this merger activity, the prices of both stocks have struggled in the last eight or nine years. As can be seen by looking at the Price Chart of both stocks, since the 2001-2002 market correction, AT&T and Verizon’s prices have been largely flat with the exception of a short period from mid-2006 to late 2007. Relatively anemic growth in per-share earnings can perhaps explain this; looking at the Annual Rates box, located part way down the left side of the page, shows that in the last ten years, AT&T’s earnings per share have grown at a yearly rate of only 1.5%, and Verizon’s has actually decreased by 1%, on average, per year.
Deeper insight into the evolution of these companies can be gleaned by examining past valuation measures versus present ones. Looking at the historical portion of the Statistical Array shows that in 1999, AT&T’s average annual P/E ratio was 24.4 and its average annual yield was 1.8%; Verizon’s were 20.1 and 2.5%. In 2009, by contrast, the average annual P/E and yield numbers for AT&T and Verizon were 12.1 and 6.4% and 12.7 and 6.1%, respectively. This inversion of AT&T and Verizon’s P/E and yield metrics over the last ten years shows that these stocks are no longer viewed by investors as entrepreneurial growth plays, but are coveted rather for their good yield and well-defined total return potential. The stocks’ total returns can be seen on the bottom right corner of the Price Chart.
How do AT&T and Verizon measure up as capital-preserving, income-producing investments? To start with, the stocks’ prices are quite stable, with both garnering the highest possible score of 100 on the Price Stability metric, found in the Ratings box on the bottom right of the page. Second, the stocks are not very volatile, with AT&T registering a 0.75 Beta coefficient and Verizon a 0.70 (the Beta coefficient is listed in the Ranks box at the top left of the page). Both companies earn an A+ mark for Financial Strength (also found in the Ratings box). Thus, it should come as little surprise that both equities earn the highest Rank for Safety (located in the Ranks box). As capital-preserving investments, therefore, both AT&T and Verizon stack up rather well.
Both stocks generate healthy returns for investors via dividends. Checking the historical portion of the Statistical Array once more, we see that AT&T’s regular dividend has risen every year since 1994 (the drop from 2003 to 2004 is due to the payment of a one-time special dividend in 2003, information which can be found in the Footnotes). Verizon’s payout growth has been a bit more punctuated, with a stall from the late 1990s to the mid-2000s. Nevertheless, both stocks’ yield in 2009 was over 6% and current yields (found on the Top Label) are in the high 5% range. These are above-average yields, promising investors solid total returns. Looked at from a risk-adjusted perspective, the yields are even more attractive.
Investors may well wonder whether there is a difference between these two high-quality, market-leading telecommunications equities. Examining metrics such as Timeliness, Safety, Beta (all available in the Ranks box), or Price Stability, Financial Strength, Price Growth Persistence (all available in the Ratings box), or projected growth rates (available in the Rates box), or interest coverage and market capitalization (both available in the Capital Structure box), together show very few or minor differences between the companies and their stocks.
Reading the Analyst Commentary, however, does reveal some differences in the ways the two companies do business and thus in their outlooks. Value Line analyst Kenneth A. Nugent writes of Verizon’s several capital spending intensive campaigns, including the recently ended FiOS rollout, and the just starting 4G network upgrade. Justin Hellman, on the other hand, writing about AT&T, focuses on that company’s operating partnerships, with the iPhone and iPad relationships and video-bundled service “packaging” key to AT&T’s profits. Indeed, checking back with on the Statistical Array, we see that one of the major, measurable differences between the two companies is the ratio of capital spending per share to cash flow per share. AT&T’s capital spending is usually just a little bit above half of its cash flow, and is often less than half of cash flow; Verizon’s capital spending, on the other hand, is often more than 75% of cash flow.
What does this mean for investors? It is likely that Verizon’s dividend coverage is a little tighter. This might help explain why the company stopped increasing the dividend for more than half a decade in the late 1990s and early 2000s. What’s more, Verizon’s profit growth is a little more exposed, should a capital crunch squeeze cash flow needed to fund expansion. On the other hand, AT&T may not be spending enough to update its technologies and compete in the ever evolving telecommunications marketplace. Thus, although the valuations do not show it, Verizon remains a somewhat more entrepreneurial investment play, whereas AT&T is a bit more conservative and safe.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.