AT&T and Verizon: 2 Solid Stocks
Anthony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article will discuss AT&T (NYSE: T) and Verizon (NYSE: VZ), and why I think these are great companies to own. For the long-term, my investment strategy is to hold and own great companies that have strong businesses, and that pay solid, dependable dividends.
AT&T has increased its dividend for 28 consecutive years through 2012. It currently has a dividend yield of 5.1%, which offers a nice premium to treasury yields and most bonds. Verizon has followed suit with dividend increases since it was spun off from the original AT&T in the early 1980s.
Following is a five-year percentage change price chart in comparison to the S&P 500 for the same time period.
Over the past five years, Verizon has outperformed the S&P 500, while AT&T has lagged. After adding in dividends, it significantly adds to the return for these two stocks. This underperformance by AT&T is short-term, in my opinion, and I believe that shareholders who own the stock for many years will still be rewarded, regardless of their share price entry point.
Consistency during hard times
When the 2008-2009 economic crisis hit, these were great stocks to own. The share prices did go down quite a bit, but these have proven to be great entry points. If you bought shares when the price went down, you would have a significant gain right now. Furthermore, the dividends were maintained and still increased in these times. Long-term shareholders did not have to do anything but hold the shares and everything has turned out alright. This is an important factor to me when considering a stock to add to my portfolio.
U-verse - AT&T's growing business
U-verse is a fast-growing segment for AT&T. High-speed internet and consumer VOIP connections grew in the first quarter of 2013 by 42.2% and 27.8%, respectively, compared to the first quarter of 2012. There were 8.7 million total subscribers to this service as of March 31, 2013, and plans are in the works to expand this service to 8.5 million additional customer locations.
This video service represents an exciting opportunity for AT&T shareholders. In the future, if it continues to grow, it could be a business that AT&T can spin off. TV service is a great market, and with AT&T's expertise in advertising and managing businesses, it is poised for future success, in my opinion.
Currently, Verizon Wireless is a joint venture between Verizon and Vodafone. There have been many rumors and statements made that indicate that it is very likely that Verizon will be acquiring this business. Based on information from Verizon's most recent 10-Q for the first quarter of 2013, this business grew by 6.8% compared to the quarter ending in March 2012. Its service revenue grew by 8.6% in this time period. This wireless business is the best in the world.
Verizon has the ability to purchase this entire business, based on its financial position and the ability to swap shares to make it happen. If this happens, the company has the prospect of spinning it off as a new company in the future if it proves to be value-added to investors. Furthermore, its wireline business has significant areas of strength, based on its 10-Q, with mass markets experiencing 3.3% year-over-year growth. The company's future decisions as to which will become its core business areas will play a large role in determining if any non-core assets could be sold or spun off as a new company.
I like these companies because they have a long history of rewarding shareholders through dividends, share price increases, and spin-offs. Over the course of history, owning shares of the original Ma Bell has provided investors the opportunity to receive shares of many new companies. These spin-offs have proven to produce great returns for long-term shareholders. This fact presents a strong case for holding stocks like these for the long-term. I compare the original Ma Bell to the original Altria (NYSE: MO), as both companies have spun off many others over the last 20-30 years.
Because of the fact that dividends are growing for both Verizon and AT&T, this provides further reason to hold the shares. At current dividend yields, without considering compounding interest or share price increases from dividend increases, in 20 years (based on a 5% yield) a shareholder will recover all of his purchase price and still own the shares.
The value of Altria's spin-offs
To illustrate the value that spin-offs have created for all three of these companies, let's take a look at Altria's spin-off, Philip Morris International.
Philip Morris International was effectively spun off from Altria on March 31, 2008 at an effective price to shareholders (at that time) of $51.06 per share of Philip Morris. Since that time, shares have gone up considerably, as they trade today at around $92 per share. In addition, the company also pays a decent dividend, which has a current yield of about 3.7%.
Kraft was spun off from Altria in April 2007. The effective price of that spin off was around $21.90 per share. Since that time, Kraft rose considerably and has recently split into two companies. Shareholders of Kraft received shares of Mondelez International and Kraft Foods Group. Shareholders of Kraft, when it was split into two companies, received one share of Mondelez for every share owned of Kraft, and one share of Kraft Foods for every three shares owned of the original Kraft. At current price levels, the value of this creation is $30 (Mondelez's share price) plus $18 (one-third of Kraft Foods' $54 share price), or $48. Add that to the dividends and you have a great return.
To sum it all up
I believe these companies are here to stay, and I view these as top choices for any portfolio. I would recommend investors consider dialing up Verizon and AT&T for their portfolios, as over time, they have proven to be more than capable of answering the call of investors seeking long-term value and returns. I also believe that Altria is a great stock for the long run.
Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone’s love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's premium research report on the company.
Anthony Parsons owns shares of Verizon Communications, Altria Group, Vodafone Group, and AT&T. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!