A new era will begin soon for Verizon (NYSE:VZ) stock. The communications giant will launch its long-awaited 5G network on Apr. 11, setting up another battle between VZ and its longtime-rival, AT&T (NYSE:T).
Many will prefer VZ stock due to its first-mover status. Others will likely favor AT&T due to factors such as its more diversified holdings and its 5G network that will probably become the industry standard. However, because VZ will be one of the three companies to own a nationwide 5G network, VZ stock should move higher once consumers widely adopt the new standard.
Verizon Will Lead the Way on 5G
The Apr. 11 launch will bring 5G only to select areas of Chicago and Minneapolis. Nonetheless, that will make VZ the first company to bring 5G wireless service to the market. It also places pressure on peers AT&T and T-Mobile (NASDAQ:TMUS) to play catch-up.
But first-mover advantage is not the only key difference between VZ and its longtime peer, AT&T. As with 3G and 4G, Verizon will use a version of connectivity that will differ from its peers.
In past years, VZ utilized CDMA wireless networks while AT&T and T-Mobile used the more common GSM standard. That difference will continue in the 5G realm.
VZ stock has delivered positive, long-term returns despite the fact that it uses a different type of network. Likewise, using a different type of 5G network will likely not hurt Verizon stock.
VZ Stock Has Become an “All-In” Bet
Verizon has adopted more of an “all-in” strategy than its peers on 5G. Although it owns what once encompassed AOL and Yahoo, it has pursued a smaller content-media strategy than AT&T, which recently completed its $85 billion Time Warner acquisition.
The strategy of VZ stock itself is also different. Both VZ stock and AT&T stock have low price-earnings ratios. Both also pay generous dividends, which have increased every year for decades.
However, the stocks’ PE ratios and dividend yields indicate that investors have more confidence in Verizon stock. Due to concerns about AT&T, its forward PE ratio has fallen to 8.8, while its dividend yield now stands at 6.5%. The valuation of VZ stock also appears reasonable. Still, with its relative stability, its forward PE comes in at a higher 12.3 with a dividend yield of 4.1%.
TMUS stock pays no dividend, and its forward PE stands at 14.9. For this reason, I give both T and VZ stock the edge over T-Mobile. Also, for risk-tolerant investors, I agree with Barron’s that AT&T, with its lower valuation and higher dividend yield, is superior . However, for those who are more risk-averse, I see many reasons to take a closer look at VZ stock.
VZ Will Become “Systemically Important”
Verizon’s future depends almost exclusively on the success of 5G. For this reason, many will think that calling its “all-in” strategy less risky appears to be illogical.
However, the importance of 5G will keep the three companies that own 5G networks—AT&T, Verizon, and T-Mobile—critical components of the overall economy. In essence, they have become “systemically important” in the same way that the stability of the largest banks has become vital to the health of the American economy. Due to our dependence on wireless communications, much of the economy would cease to function if the carriers’ networks failed. This makes VZ stock one of the few “all-in” bets that are safe.
Ironically, AT&T’s “diversification” into content could make that stock less safe. With its move into content, AT&T has become a competitor of industry giants such as Disney (NYSE:DIS), Apple (NASDAQ:AAPL), and Netflix (NASDAQ:NFLX).
AT&T will struggle to match the heavy content spending of those companies. I doubt a failure of AT&T’s content strategy would destroy it since it could sell its content assets. Still, since AT&T spent tens of billions to develop a 5G network, it is unable to match the content spending of its peers. That makes the likelihood of AT&T’s success in this area far from certain and could push more investors looking for a play on 5G into VZ stock.
The Bottom Line on VZ Stock
VZ stock will likely benefit from its increased systemic importance. Verizon will lead the way as it launches some localized 5G networks later this month. However, as all three major wireless companies take networks online, many believe AT&T’s diversification and its own 5G networks will give T stock the advantage over Verizon stock.
Investors who can tolerate risk will more likely choose AT&T with its lower PE ratio and higher-yielding dividend. However, as 5G becomes an essential component of the economy, Verizon’s strategy to bet primarily on wireless could make VZ stock less risky than its more content-dependent peer, AT&T.
Moreover, VZ’s valuation and dividend advantages probably give it the edge over T-Mobile. As a result, those who want less risk and a growing stream of 5G-related income are more likely to choose Verizon stock than its peers.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
