Telecommunications has become an increasingly difficult space for investors to make money in, despite the fact that industry power is concentrated among very few national players. High capital requirements make it a costly business to operate in and there are fairly low switching costs for most consumers choosing their service providers.
Two of the biggest names in the industry are CenturyLink, Inc. (NYSE: CTL) and AT&T (NYSE: T), which are both profitable but heading in different directions strategically. Here's why I think one is a much better buy than the other.
Image source: Getty Images.
Heading in different directions
The legacy of CenturyLink and AT&T tells a lot about where the companies are going for the foreseeable future. CenturyLink's legacy business was in landlines, which have been in a long decline and forced the company to turn into a broadband- and service-focused company. It's tried to bundle services, but it doesn't own a cable operator, so it's now bundling DIRECTV service with phone and internet service. (Ironically, DIRECTV is actually an AT&T business.)
Acquiring Level 3 Communications gave CenturyLink a more enterprise-focused business, but I don't think that's enough to outweigh the loss in legacy phone service in the long term.
AT&T's core is wireless service, where it's one of the top two providers in the country. Wireless connections are growing and AT&T has leveraged its wireless position to move into satellite TV and now content creation after acquiring Time Warner.
AT&T's strategic position is clearly stronger and that shows up in the company's financials as well.
Show me the money
You can see below that AT&T's return on assets has been consistently higher than CenturyLink for the past decade. What's critical in the chart below is that the gap has widened and CenturyLink has bounced around low-single-digit returns on assets for the last six years.
Telecommunications is inherently a capital-intensive business, so if CenturyLink can't generate a return on the assets it invests in, it isn't doing well as a business. That's why the chart above should be disturbing to investors.
AT&T is set up to succeed
There are two major trends we see from telecommunications companies today, including broadband providers. One is that they're investing more in wireless where they have the ability, as AT&T and Verizon have done. More and more devices will go wireless in the future, especially as we see high-speed networks like 5G hit the market.
The second is that they're diversifying into the content itself. Telecommunications has always been built on connecting people and businesses, but today it's shifting to distributing your own content. That's why AT&T, Verizon, and Comcast have acquired content creation assets in the last decade.
AT&T is arguably best-positioned of all of these major companies because it owns a top-two wireless network and top-tier content with Time Warner. Add in DIRECTV, and it can offer a full complement of services to customers.
CenturyLink can't keep up with AT&T
In this battle, AT&T has better assets, better returns, and is better-positioned for the future. It's easily a superior stock to CenturyLink and it's well-placed for a wireless, content-centric future.
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