Which of These 3 Telecoms Should You Dial Up?
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Telecom companies are generally quite generous with their shareholders. Let's look into three major U.S. telecom companies to find out which rises above the rest. As you can see, the majority of the US mobile phone market is controlled by Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint Nextel (NYSE: S).
There are various ways to evaluate a company's price. The most common format of a stock's value is the price to earnings ratio. However, this is an "accounting figure" that can be skewed by various internal factors. For this analysis, let's instead use price to cash flow.
- Verizon - 5.1 times cash flow
- AT&T - 7.4
- Sprint - 9.4
Winner: Verizon is the cheapest based on cash flow to share price. With Verizon, you're getting the most cash for every dollar you invest. Cash flow is a company's "blood". It drives growth and shareholder returns.
Dividends are what I like to call "easy money". But dividends are more than the occasional gift to your bank account. They also stand for the ability of a company to generate enough profit to pass off portions to shareholders while still operating and growing its business.
A company that has been able to consistently pay and raise dividends validates its business model. Let's examine the dividend history, dividend growth rate, and dividend payout of each company.
AT&T is known as a dividend stalwart. Based on current prices, its dividend is around 5%. It has also raised its dividend for 29 straight years. Dividend growth has slowed from a 10 year rate of 5.2% to a 3 year rate of 2.4%. AT&T is currently paying out 50.7% of its free cash flow as dividends.
Verizon has increased its dividend 8 years in a row. Based on current prices, it yields around 4%. Its dividend growth rate has remained relatively flat for the last decade at about 2.7% annually. Verizon pays out slightly less than half of its free cash flow, somewhere near 45%
Sprint does not currently pay a dividend. The last dividend Sprint paid was in December of 2007.
A higher yield and longer history of dividend increases gives AT&T the edge over Verizon. At some point in the future, Sprint may yet again pay a dividend.
Verizon recently announced the completion of its 4G LTE network. This gives it the most comprehensive 4G network in the U.S. Verizon's wireless segment is driving growth with a 6.8% year-over-year revenue increase.
Verizon is also gaining market share with its Fios business. Verizon has been rumored to be considering an expansion into the Canadian market as well as a deal for the interest Vodafone owns in its wireless business.
Looking at its most recent quarter, Verizon grew its earnings per share from $0.59 to $0.68. It grew its cash flow from $5.95 billion to $7.53 billion. While debt increased, this was due to the construction of its LTE network which is now finished. Look for cash flow to increase as Verizon's Fios and LTE ambitions start to generate significant returns.
Similar to Verizon, AT&T has seen a drastic decline in land line revenue due to a macro-economic shift to wireless communication. Organic growth has been a problem for AT&T of late, and it has been rumored to acquire European telecom companies to spark sales. AT&T recently added the Samsung Galaxy Note 8 to boost its top line.
In its latest quarter, cash flow was slightly up from $7.8 billion to $8.2 billion. Its EPS growth from $0.60 to $0.67 was largely attributed to share buybacks.
For some time now, Sprint has been a ship in need of righting. It has made a deal with Clearwire to increase the quality of its network. Sprint is also caught in a bidding war as Dish and Softbank have both would like to acquire Sprint.
Sprint's latest quarter shows a more grim picture than that of Verizon and AT&T. When it comes to earnings, Sprint is actually losing money. Its net operating revenue has essentially remained flat from the same quarter a year ago. Its cash flow has declined as well, which means more changes need to be made.
Based on all the criteria, the best in class appears to be Verizon. This is due to its leading share in the wireless market, its room to increase future dividends, and infrastructure. With the U.S. telecom market becoming more and more saturated, it doesn't look good for lesser players such as Sprint. While AT&T appears to be a close second, Verizon seems to be the best operator.
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Justin Pope has no position in any stocks mentioned. 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!