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AT&T vs.Verizon: Which Telecommunication Stock Is A Better Pick?

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·7 min read
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The telecommunications industry in the United States is currently going through a change, as telecommunication giants like AT&T and Verizon divest their non-core assets. These companies are increasingly focusing on the deployment of 5G networks.

Using the TipRanks Stock Comparison tool, we will compare two telecommunication companies, At&T and Verizon, and see how Wall Street analysts feel about these stocks.

AT&T (S&P 500 :T)

AT&T is a global provider of telecommunications, media and technology services. The company has been in the news this year due to the divestiture of its assets. Earlier this year, the telecommunications giant announced the spin-off of its U.S. video operations and the formation of a new company, “New DirecTV,” in partnership with private equity firm TPG Capital. The transaction was valued at $16.25 billion.

Similarly, last month, the company announced the spin-off of its WarnerMedia unit and the unit's merger with media company Discovery (DISCA). The spin-off would result in the formation of a new company wherein AT&T shareholders will own 71% of the combined company while Discovery will own the remaining 29%. The transaction will generate $43 billion for AT&T in cash and debt.

AT&T is expected to report its second quarter results on July 22. AT&T’s CFO, Pascal Desroches, updated the company’s shareholders last week at the Credit Suisse Communications conference.

Desroches stated, “…in the most recent quarters, AT&T’s mobility strategy of focusing on the long-term value of its high-value customer base has been successful in reversing previous subscriber losses.”

Regarding WarnerMedia, it expects Q2 results to improve compared to the year-ago quarter, which was the worst hit by the pandemic. Desroches reiterated the planned international launch of HBO Max and and stated that he expects it to meet its guidance of 67 to 70 million HBO Max customers by the end of this year.

The company reaffirmed that the current dividend will not be reset before the completion of the WarnerMedia deal. However, Desroches added that after the completion of the deal, the dividend will deliver an attractive yield in the 95th percentile of the dividend-yielding stocks.

AT&T had reduced the dividend payout ratio following the WarnerMedia spin-off and anticipates an annual dividend payout ratio between 40% to 43% on expected free cash flow in excess of $20 billion, following the close of the transaction.

Following the WarnerMedia spin-off announcement, Raymond James analyst Frank Louthan reiterated a Buy on the stock. Louthan commented that the reduced dividend payout ratio implied “a ~45% reduction in the AT&T dividend from current levels.”

According to Louthan, this was a deviation from the company’s strategy of maintaining or growing its dividends and “will likely linger in investors' minds for many years.” However, the analyst said that with the possibility of a dividend readjustment in the middle of next year, it “would see four more payments at current levels.”

The CFO also said that the company is planning to accelerate the implementation of the C-Band spectrum (for 5G) and expects to cover 200 million people over the next two years. The company also plans to double its fiber footprint to around 30 million customer locations by the end of 2025.

Desroches continues to expect AT&T’s revenue CAGR to be in the low-single-digits over the long term from 2022 to 2024 and anticipates mid-single-digit adjusted EBITDA and adjusted EPS CAGR, subject to completion of the deal with WarnerMedia. (See AT&T stock chart on TipRanks)

Analyst Louthan commented on this outlook, “We remain positive on AT&T as we believe the simplification of the story and continued deleveraging create shareholder value, as both this deal and the prior decision to divest the DIRECTV platform exemplify.”

Consensus among analysts on Wall Street is a Moderate Buy based on 7 Buys and 6 Holds. The average AT&T analyst price target of $32.17 implies approximately 12.3% upside potential to current levels.

Verizon (S&P500: VZ)

Verizon Communications is a provider of communications, technology, information and entertainment products and services that has two business segments, including Consumer Group and Business Group.

The company’s consumer business segment provides wireless and wireline communications services and products, while the business segment provides data, video and conferencing services, corporate networking solutions and security and managed network services.

Verizon is expected to announce its second quarter results on July 21. In Q1, the company posted revenues of $32.9 billion, with a year-over-year growth of 4% and an adjusted EPS of $1.31 per share.

For FY21, VZ expects wireless service revenues to grow by 3% year-over-year while services and other revenues are expected to rise by 2% year-over-year. The company expects adjusted EPS to land between $5 and $5.15 per share.

The company is increasingly focusing on the deployment of 5G with the combination of C-Band and millimeter wave spectrum.

Verizon stated at its earnings call, “Our intent is to invest $10 billion of incremental C-Band CapEx to accelerate the integration on this capacity into our network… We do expect C-Band-related capital spending to be between $2 billion to $3 billion for 2021…”

A couple of days back, the company’s business segment launched its first commercial private 5G network solution in the U.S., allowing corporate and public sector customers to bring 5G services to their premises.

Earlier this month, the company kick-started its 5G upgrade campaign by offering customers a 5G-enabled mobile phone, in exchange for their old phones, on VZ’s unlimited plan.

VZ’s existing customers could get a free iPhone (AAPL) 12 or Samsung Galaxy S21 5G-enabled phone with the switch. Following the 5G upgrade campaign, Oppenheimer analyst Timothy Horan reiterated a Hold on the stock.

Horan said about the campaign, “As of last quarter, only ~7M of VZ subs have C-Band compatible devices. The focus is to migrate as many customers now onto compatible devices ahead of VZ deploying C-Band spectrum to 100M POPs [point of presence] by early 2022.”

In addition Horan updated the financial model for the company and stated, “Lowering FY21 rev. and adj. EBITDA 20bps on adjusting the timing for TracFone [acquisition] but offset from higher equipment sales. We are raising postphone phone subs by 100K on volumes improving and the new promo should help.”

In September last year, Verizon offered to buy TracFone, a unit of America Movil, for $6.3 billion. The deal has yet to get regulatory approval. TracFone is a wireless services reseller that provides wireless services under the government benefit program in select U.S. states and targets value and low-income segment users. (See Verizon stock chart on TipRanks)

Consensus among analysts on Wall Street is a Hold based on 2 Buys and 8 Holds. The average Verizon analyst price target of $60.57 implies approximately 8.5% upside potential to current levels.

Bottom Line

It is interesting to note here the analysts’ take on the companies. According to Horan, VZ has the second largest wireline market share after AT&T. Horan seems to approve of VZ’s divestiture of its “non-core assets in order to focus on wireless and enterprise and on FiOS (its fiber voice/video/data offering) in its wireline segment, and now value-added services/content.”

Meanwhile, Jeffries analyst Frank Louthan had commented after AT&T’s WarnerMedia spin-off, “We suspected AT&T would be selling some assets beginning with Turner, given the backseat it took to HBO Max and the studio business at the March Analyst Day, but management appears to be accelerating the VZ strategy of "renting" media content rather than owning it.”

While analysts are sidelined on Verizon, they are cautiously optimistic about AT&T.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.