Ma That was a Good Try

By Chad Henage - August 3, 2012 | Tickers: T, S, VZ | 0 Comments

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AT&T (NYSE: T) used to be referred to as Ma Bell. Whether this was a term of affection or not is questionable, but everyone knew Ma Bell and comedy spoofs were even written making fun of the company's terrible service. The company's service is no longer terrible, but AT&T just can't keep up with Verizon (NYSE: VZ). On nearly every metric that the two companies are measured on, AT&T's most recent earnings report shows the company's numbers were less than Verizon. While both are loved by dividend investors, one appears to be simply the better value.

AT&T reported mobility revenues up 4.8%, wireline revenue down 0.8%, and earnings-per-share increased 10%. Like many telecom companies, AT&T has a growth engine in their mobility service, and they are attempting to offset wireline losses by signing up new Internet and video customers. In addition, AT&T and Verizon have been buying back shares as a way to return cash to their shareholders. Let's take a look at AT&T's two divisions, to get an idea of what's going on with each.

AT&T Mobility

AT&T mobility showed decent growth, with revenues up primarily due to an increase of 7.8% in data revenues. In addition, the company gained 1.3 million wireless subscribers to reach a total of over 105 million. Unfortunately for AT&T investors, this is one of the only numbers that AT&T posted better than their chief rival Verizon. Take a look at a side-by-side comparison of some of the key growth metrics and you tell me which company is doing better:

I think it's pretty clear that Verizon is doing a better job in nearly every key area. Just for point of comparison, both companies are still outperforming Sprint (NYSE: S) in particular when it comes to churn. Sprint has a churn rate of 1.69%, which is nearly double AT&T and Verizon. This is linked to the positive network effect that I've written about before, where both AT&T and Verizon benefit from their larger customer bases. With over 100 million subscribers at AT&T and over 90 million at Verizon, it simply is more likely that new customers will sign up with these two companies over the 56 million subscribers at Sprint. If Verizon is the clear winner on the wireless side of the house, what about wireline?

AT&T Wireline

AT&T reported Wireline revenue down 0.8%, and total switched access lines down 12.72% on a year-over-year basis. Since nearly every telecom is reporting losses in total access lines, it makes more sense to look at the company's future which is broadband and video. One business that AT&T has a significant advantage is in broadband connections. While the company reported basically flat connections year-over-year, their total is still 16.4 million versus Verizon which has just 4.5 million subscribers. Where video subscribers are concerned, each company did very well in the last quarter. AT&T gained 155,000 new subscribers and finished the quarter with 4.1 million total. By comparison, Verizon gained 120,000 new subscribers and finished the quarter with 4.5 million total. While this looks very similar, it seems that AT&T has more potential in the video division as their penetration rate stands at just 17.3%. When you consider that Verizon has a penetration rate over 32%, you can see that in theory Verizon would reach saturation faster than AT&T. After looking at the wireless and wireline divisions, it appears that AT&T and Verizon are relatively even, however where Verizon really stands out is in the financial comparison.

It All Comes Down to Cash Flow

There is a large difference in the companies free cash flow payout ratio. While AT&T's most recent cash flow payout ratio came in at 65.66%, during the same quarter Verizon's payout ratio was just 32.99%. With a lower payout ratio, Verizon offers the potential for bigger dividend increases than AT&T. The odd man out in this equation is still Sprint. The company does not pay a dividend and the company's cash flow isn't even in the same ballpark of its two larger competitors. Sprint generated just over $200 million in free cash flow in the last quarter, versus over $7 billion at both AT&T and Verizon. You can see that even being the 3^rd largest carrier appears to be a huge disadvantage. Huge cash flow and a lower payout ratio in my eyes means Verizon wins this battle.

These Two Companies are Not Really Equal

In the end, it looks like Verizon is doing the best overall job for its shareholders. While I know some people believe that AT&T is an equally good investment, comparing the companies earnings reports shows Verizon coming out ahead. Analysts expect Verizon's future growth rate to exceed AT&T's by about 2%, and there is only a 0.5% difference in their yields. This would seems to be further proof that Verizon should be the better choice. The old Ma Bell is giving it a good try, but just can't keep up with Big Red.

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