What Makes This Telecom Stock Better than That
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In the recent past, the largest US telecom carrier, Verizon (NYSE: VZ) hasn’t impressed the investors hugely and even the stock price has plunged as much as 9% in the past few weeks. The telecom giant has been losing to its chief competitor AT&T (NYSE: T) in terms of iPhone shipments and yield. Despite this Verizon is a very good investment and probably a better one than AT&T. Let’s take a look at the how and the why of this argument.
On a comparative landscape AT&T has performed better in the past as it sold more Apple iPhones, paid better dividends and the stock’s performance was also better. But wise investing looks into the future and when that is factored in, Verizon is looking like a better investment. While both companies are investor favorites when dividends are considered, as both have been high yield choices, AT&T has been doing better. AT&T's yield has been greater than Verizon's and this has been happening for the past few years. Presently Verizon's yield is almost 4.7% while AT&T is ahead with about 4.8%. However, we must also take into account the amount by which these companies have been increasing their dividend payments. Verizon increased its dividend from $0.46 per quarter to $0.50 per quarter while AT&T increased the same only from $0.41 to $0.44 per quarter. So, if Verizon keeps up with this trend it is likely to increase its dividends faster than AT&T.
The main reason for AT&T’s recent better success can be attributed to the higher dividend payments, but that is about to change. Going forward, Verizon’s yield may turn out to be higher as the dividends can be expected to shoot up. The largest US telecom carrier has been working on improving its health by reducing its long-term debt by $1.5 billion over the last year. The company also has positive working capital now, unlike AT&T, and its cash and investments have also increased steadily while the current ratio is also looking solid at above 1. Even revenue has improved greatly for Verizon and the company has almost doubled its top line in the past 10 years from $15 billion to $28 billion. Moreover, capital expenditures are also expected to fall or stay at current levels and this coupled with increasing revenue will help to generate more free cash flow. All of this will help Verizon improve its dividend payments and delight the investors with higher returns.
The top three telecom giants came out with their earnings of the latest quarter recently and though Sprint (NYSE: S) topped the chart with a year on year 6.5% surge in the top line as against Verizon's 3.7% and AT&T's 0.3%, the company is not as attractive an investment as the top two telecom giants. Though Sprint has improved its health greatly in the recent past, its fundamentals are still not that strong and this poses as a risk for investing. Plus, the company is also not offering and dividend unlike Verizon and AT&T. And now among the top two, in comparison to AT&T, Verizon seems to have fared better. While the second largest US telecom carrier AT&T reported a nominal 1.04% rate of growth in its top line for the first half of 2012, Verizon grew its sales 4.16% during the same period. Again on a year on year basis, Verizon also posted better EPS growth of 12.3% in second quarter of 2012 as against 10% hike of AT&T.
Looking at the future also, Verizon seems to be a better investment choice than AT&T. Analysts are expecting Verizon to increase revenues by 3.9% in 2012 as against expectations of just 0.3% from AT&T and in 2013 also Verizon is expected to perform better with a growth of 3.4% while AT&T might report 1.2% only. Coming to earnings per share, Verizon is expected to post an almost 16% rise in 2012 and 13% in 2013 while AT&T is expected to post only 9% increase this year and 7% increase next year.
Though Verizon has been less lucrative than AT&T till now, it is expected to perform much better in the days to come. Presently, Verizon is trading at a ttm P/E of 42.39 while AT&T is trading at 48.99 and this makes Verizon pretty attractive in terms of relative valuation especially when the huge growth prospects of the company are taken into account.
The users perceive the telecom giant to be a leader when it comes to network quality and it also enjoys a pricing power over its suppliers. These, along with strong cash generation and improving debt situation, make the company ready to benefit from revenue and earnings growth while still trading at a very comparable valuation. As the business performance improves, the company will also raise its dividends and thus pull up the yield automatically. All these factors coming together make me bullish on this stock and I feel the future of good investment lies in Verizon.
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