Dow Phone Giants and Other Telecom Options

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Dow-30 houses both companies in the effective U.S. cell phone duopoly, AT&T (NYSE: T) and Verizon (NYSE: VZ). These two phone giants both offer solid yields, but are they worth owning? And what about some other high-yielding telecom options?

AT&T
Today's AT&T is very different from the AT&T of old, as it is a partial rebuilding of the government mandated breakup AT&T suffered in the 1980s. In its current incarnation, AT&T provides wireless communications, local exchange services (wire line phone service), long−distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking, and wholesale services. It is, however, best known for being one of the two largest cellular phone carriers in the United States, and the first to work with Apple to sell and support the iPhone.

SWOT Analysis for AT&T
Strengths (Internal)
Part of a U.S. telecommunications duopoly.
Large consumer customer base from once exclusive iPhone sales.
Financially strong and relatively recession resistant.
Ability to sell multiple services to its customers.

Weaknesses (Internal)
Continued reliance on a shrinking wire line business for revenues.
Pension liabilities coupled with AT&T's debt load could strain finances if revenues were to falter.
iPhone is an important, and expensive, part of the company's business.

Opportunities (External)
Cell phones increasingly considered necessities.
Continued expansion of demand for cellular data.
Video an increasingly used medium.

Threats (External)
Technology advances.
Customer demand for “hot” cell phones can change quickly.
Legal and regulatory changes.

Verizon
Verizon is one of the companies spun off from AT&T when it was forced to break up. It offers similar services to AT&T, but breaks its offerings into two broad categories, Verizon Wireless and Wireline. The big difference between Verizon and AT&T is largely ownership, as Verizon Wireless is a joint venture between Verizon (55% owner) and Vodafone (NASDAQ: VOD) (minority 45% owner). Although Verizon is the controlling partner, this is a relationship that adds complication to the picture and potentially increases costs going forward, if Verizon buys Vodafone out.

SWOT Analysis for Verizon
Strengths (Internal)
Part of a U.S. telecommunications duopoly.
Considered to have the most reliable and far reaching wireless network.
Large customer base.
Financially strong and relatively recession resistant.
Ability to sell multiple services to its customers.
Long-term plan for wire line business viewed as strong, particularly as upgrading costs (FiOS) wind down.

Weaknesses (Internal)
Continued reliance on a shrinking wire line business for revenues.
Although working to mitigate pension liabilities, these costs are still material.
Complicated ownership structure for wireless operations. 

Opportunities (External)
Cell phones increasingly considered necessities.
Continued expansion of demand for cellular data.
Video an increasingly used medium.

Threats (External)
Technology advances.
Customer demand for “hot” cell phones can change quickly.
Legal and regulatory changes.

Which is Better?
At the end of the day AT&T and Verizon are very similar companies. Their growth profiles, though not impressive, are also very similar. Both are yielding around 5%, though AT&T's yield is over 50 basis points higher. Moreover, over the last 12 months, the two stocks have performed roughly in line with one another. Both, however, might be a bit overvalued at present.

<img src="http://media.ycharts.com/charts/40d1aeef7cb063da0f095e5c930d67fc.png" />

VZ data by YCharts

Other Options?
For investors picking between AT&T and Verizon is probably a bit like choosing between six of one and half a dozen of another. However, there is a great deal more variety when you look past these two industry giants. Here are two high-yielding rural phone companies to look at:

Consolidated Communications (NASDAQ: CNSL)
Consolidated Communications provides local and long distance phone service, high-speed internet access, and television services to residential and business customers in California, Kansas, Missouri, Illinois, Texas and Pennsylvania. It generally serves rural areas where there is less competition for customers. Its core business, however, is largely in decline, as customers switch to cell phones and other digital telephone options. It has the ability to compete with its own digital services, with customers simply switching between its offerings, but bundled packages from cable companies are a material threat. So far, however, the company has done a solid job of keeping its businesses going. The stock currently yields north of 10%, but the stock price can be a bit volatile at times.

Windstream (NASDAQ: WIN)
Windstream offers phone, high-speed internet access, and television services to residential and business customers, too. Although it focuses on rural areas, as well, the company has operations in 48 states through a business services division that offers cloud computing and other services. This is a key difference between Windstream and Consolidated Communications, that makes Windstream more like a smaller version of the big players. In fact, shifting from a rural telecom to a business services company is the long-term goal here. If the company is successful, it could be a solid long-term investment. A sometimes volatile stock price is an issue, but an over 10% dividend yield helps to make up for the added risk. Still, while there is potential, there is also the risk that the business transition doesn't go as smoothly as management would like.

Yours,

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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T;, Vodafone Group Plc (ADR), and Vodafone Group Plc (ADR). 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!

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