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AT&T and Verizon – A Boring, No-Brainer Double Buy

This Friday, hordes of tech-obsessed (and status-conscious) American will bum-rush stores to get their hands on a new Apple (AAPL) iPhone, be it the plain ol’ iPhone 6 or the “phablet” iPhone 6 Plus.

But another stampede has been in progress for months — of investors clawing their way into Apple stock, with Wall Street driving AAPL stock higher by nearly 10% in the past three months as buzz over these new offerings swelled to a fever pitch.

Should you buy Apple stock now and ride the hype machine even higher? Or is Apple’s march to all-time highs doomed just like its last peak back in 2012, which saw AAPL prices nearly halved in less than a year?

I don’t know. Personally, I get all my tech-growth jollies from Tesla (TSLA), so I don’t care.

What I care most about Apple’s high-profile release is what it means for the big, boring, cash-generating machine of Big Telecom — AT&T (T) and Verizon (VZ).

Telecom — Feeding America’s Mobile Addiction

America has both a love for and a dependence on mobile technology. Consider that from March 2011 to March 2014, the number of Americans who owned smartphones ballooned from 72.5 million to 166 million.

And it’s no big secret that someone has to provide the wireless technology on all those smartphones.

While there are smaller players such as T-Mobile (TMUS) and Sprint (S), AT&T and Verizon are the two-headed dragon of U.S. telecommunications service. The duo combine for nearly 70% of the nation’s market share, which leads some to call them the “virtual duopoly.” That dominance has been the status quo for years, and while T-Mobile and Sprint (and even smaller players) will continue to push out innovative deals to try to change that, the simple fact of the matter is that changing providers is a hassle, and options are severely limited anyway.

The flip side of this is that telecom is hardly a growth story — U.S. and Europe smartphone penetration is considered to be drawing nigh, and growth expectations for T and VZ stock are thus muted. But it doesn’t have to be.

In short, AT&T and Verizon are essentially utilities. They provide a service that most Americans simply have to have. And when you consider that Apple got 4 million-plus preorders for its two new iPhones within the first 24 hours of availability … it’s clear America’s close relationship with smartphones isn’t going anywhere.

And just like with utilities, there’s no expectation for rip-roaring stock gains out of T and VZ stock, but neither is there much concern about sudden drops, either.

The expectation is for AT&T and Verizon to keep putting their cash to work through pleasing shareholders — after all, that’s what they’ve done for decades.

Should You Buy T Stock or VZ Stock?

As far as their core businesses go, AT&T and Verizon couldn’t be more similar, and both of them yield fat, sustainable dividends.

Truth be told, either is a good holding. It just depends on what’s important to you. But here’s a quick look of what each offers:

  • AT&T: For one, T stock’s dividend yield of 5.3% at current prices definitely wins over Verizon’s 4.5%. Moreover, if you’re just looking for a more established history of dividend increases, AT&T wins that battle at almost three decades to Verizon’s seven years. (Hence AT&T’s place on our Dependable Dividend Stocks list.) Moreover, AT&T’s pending merger with DirecTV (DTV) also looks like a winner, providing AT&T with a television product much more attractive and established than U-Verse, namely because of the exclusive NFL contract that DirecTV enjoys and is expected to renew.
  • Verizon: The current yield on VZ stock might be smaller, but it is growing dividends at a faster rate, by about 3% annually vs. closer to 2% to AT&T. And you can expect that trend to continue. Verizon’s a much better cash generator of late, pumping out some $6.3 billion through two quarters of 2014 vs. $5.2 billion for AT&T. Plus, Verizon is paying out a much smaller percentage of its free cash flow in dividends – 60% to AT&T’s 94%. Buying the remaining stake of Verizon Wireless from Vodafone (VOD) should only improve its cash flow situation (though it did take quite a bit out of the vault). And lastly,

The decision of one vs. the other really comes down to established dividend vs. potential dividend growth.

Fortunately, we live in a world in which we don’t have to choose, and a world in which diversification ain’t all that bad, so if it’s really that painful a decision for you, buy both T and VZ.

You could do a lot worse than owning both halves of a “virtual duopoly” that should throw off hefty and growing dividends for decades until the next great technological revolution somehow renders AT&T and Verizon obsolete.

But that’s a long way off. Collect your cash until then.

Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long T and TSLA. Follow him on Twitter at @KyleWoodley.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/att-verizon-t-vz-stock/.

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