Verizon Communications Inc. (NYSE:VZ) calls the e-mail data breach at Yahoo! Inc. (NASDAQ:YHOO) a “material” event and is threatening to scuttle the deal. Most analysts think the result will be a cut in the $4.8 billion price tag, maybe to $4 billion. This is not material to either Verizon stock or YHOO stock.
Yahoo is valued based on its share of Alibaba Group Holding Ltd. (NYSE:BABA), which once the deal is finished, will be its only holding, while Verizon is worth over $204 billion, so $800 million doesn’t mean much to either.
But the breach should deliver a clue to investors. VZ is one of two big telecom-related dividend stocks in the marketplace — AT&T Inc. (NYSE:T) is the other — and investors who can only buy one should be looking at what’s happening carefully for signs of what is to come.
VZ vs AT&T
With Yahoo and its previous acquisition of AOL, Verizon has embarked on a new “vertical integration” strategy regarding the internet.
VZ hopes to control key elements of both internet content and internet advertising revenues, giving it the kind of “customer control” that companies like Comcast Corporation (NASDAQ:CMCSA) enjoy in cable, what CBS Corporation (NYSE:CBS) enjoys in television or the hold Hollywood studios had before they were broken up in the 1950s.
The Yahoo data breach, and the past performance of both Yahoo and AOL as independent entities, should give investors pause. Neither was bought out of strength. Both stocks were weak before their acquisition. Internet content companies of all kinds, like IAC/InteractiveCorp (NASDAQ:IACI), which owns The Daily Beast and Investopedia, remain down over the last year.
By contrast, AT&T has embarked on a more traditional strategy. Rather than investing at the edge of the internet, where content and commerce live, T is investing in its internet core, in cloud and in enabling technology for businesses. It does not own news or entertainment services, just systems which deliver that to customers.
Traditionally, AT&T and Verizon stock move in step with one another, and if you look all the way back to the turn of the century, you’re doing just as poorly in either one — neither stock has fully recovered from the internet bubble. Look at it back to 2006, and VZ stock looks better.
But in 2016, and especially when seen over the last six months, as the diverging strategies have become obvious, T shareholders are doing much better. They have a gain of 2.3%; meanwhile, Verizon stock investors have a decline of 2%, and AT&T’s dividend yield of 4.87% remains fatter. Add to that the fact that T has a lighter debt load — thanks to VZ’s purchase of the rest of its wireless unit from Vodafone Group Plc (ADR) (NASDAQ:VOD) last year — and the investing case becomes obvious.
So What Happens Now for Verizon Stock?
More important should be the strategic consideration of what happens now.
Verizon is a consumer-facing company. Under pressure for results, VZ has gotten into a lot of trouble with consumers lately concerning overcharging, and its response has been to close call centers in an effort to save money.
AT&T, of course, also has challenges. It bought old technology with DirecTv, it also faces consumer complaints of overcharging and its attempt to limit how much data customers access is subject to a court case.
But T has the capital strength to keep investing in “triple play” services combining internet, phone and TV service, and it is consistently outperforming its dividend payout. Verizon did not do that in its June quarter.
Bottom Line on VZ Stock
My own view is that you’re safer with AT&T stock than Verizon stock. The performance spread between the two should continue to be in T’s favor for some time.
A safe investor may want to buy some AT&T shares for the higher yield, while a more aggressive speculator might try a “spread trade,” buying T options and selling VZ options against it, profiting from a growing performance gap.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, did not hold a position in any of the aforementioned securites.
