To many investors Verizon (NYSE:VZ) has been the dim younger brother of AT&T (NYSE:T). Verizon shares are up 9% so far in 2019, while those of AT&T are up 28%.
But Verizon, which only became a nationwide wireless carrier in 2000, through a complex consolidation that left Great Britain’s Vodafone (NASDAQ:VOD) with 45% of the whole, may yet laugh last.
Credit Vodafone with some of that.Verizon paid $130 billion in 2014 to get the British company out of Verizon’s business. Even in September it had $101 billion of debt on its books from that deal.
But the debt kept Verizon from going cuckoo for content. Instead of buying DirecTV and Time Warner, as AT&T did, Verizon bought Yahoo and AOL. It was a fiasco, and Verizon has already written down $4.6 billion, about half what it paid.
But that’s still one-tenth the fiasco AT&T is facing.
Do What You Do
Verizon learned an important lesson from its losses. Do what you know how to do, and don’t do what you don’t know how to do.
Verizon knows how to run a wireless network.
As a result, Verizon’s September quarter looks pretty good. The company earned $5.3 billion, $1.25 per share fully diluted, on revenues of $32.9 billion. Its dividend, yielding 4.1%, is thus affordable.
It’s in this market, estimated to be worth nearly $283 billion in 2019, that Verizon’s future lies. Its addition of 444,000 new customers during the quarter, against expectations of 328,000, was the number that leapt out of the quarterly report.
Analysts were also pleased by its content deal with Disney (NYSE:DIS) to make the new Disney+ streaming service “free” for 12 months to new Verizon customers. Strategically it’s seen as better than AT&T’s deals tying customers to AT&T streams. It’s especially important as the perceived quality of AT&T’s service goes up, and as T-Mobile (NASDAQ:TMUS) prepares to acquire Sprint (NYSE:S), creating a more powerful third carrier.
It’s All About Wireless
While Verizon was born from the 1984 Bell breakup, with the Bell Atlantic and NYNEX units merging along with GTE in 2000, it is primarily a wireless company.
But it still has large technology debt.
Verizon’s wireline operations continue to lose customers, even those on its Fios “fiber” system. Despite the speed of its fiber offerings, wires are depreciating assets.
The wireless business also faces more competition from cloud companies. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is re-selling T-Mobile, Sprint and U.S. Cellular services as Google Fi, and bringing short message service messaging, as well as voicemail, into that service. Tencent (OTCMKTS:TCEHY), a Chinese company, is also gaining share with its WeChat service.
To compete, all the major U.S. carriers are upgrading from the SMS standard they have used for decades to a new Rich Communications Service standard. The hope is they can regain share from the cloud companies with messaging that can handle video.
Verizon is also pouring about $18 billion of capital into 5G wireless this year. Wireless represents 60% of Verizon’s revenue and it has about one-third of the U.S. wireless market.
The Bottom Line on VZ Stock
AT&T has a higher yield than Verizon, currently 5.3%, and its shares even sell for a higher trailing price-to-earnings ratio, 16.2. But I think Verizon’s yield is safer.
Verizon has less technology debt than AT&T, having a smaller wired footprint. It has less debt overall, which it’s quietly paying off. It has a tighter focus on what it does well than AT&T.
If I were advising an income investor on which of the two phone giants to buy, this is the one I’d choose.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
