Where To Invest: Verizon, AT&T or Frontier?

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

Frontier Communications (NASDAQ: FTR), Verizon (NYSE: VZ) and AT&T (NYSE: T) - all these stocks present a very interesting investment opportunity. They all return solid dividend yields, some more than others, and they all have different operating conditions.  But which stock is the best to invest in for the long term?

General Overview

Company

Forward P/E

P/S

Price to Free Cash Flow

Dividend Yield

Projected 5-year growth rate

Frontier

17.5

0.9

18.4

9.1%

3.1%

Verizon

15

1

14

4.8%

9%

AT&T

13.4

1.5

27

5.3%

6.3%

A quick overview turns up some interesting results. Despite looking expensive on a price earnings multiple, Frontier looks cheap compared to its competitors on a price to sales ratio. Verizon has the cheapest price to free cash flow ratio and is the second most expensive in the group based on the P/E and P/S multiples. Frontier has the best yield followed by AT&T, although Verizon has the fastest predicted 5-year growth rate. These figures do present a very mixed picture; however, Verizon seems to provide the best mix of value and income with the best predicted growth rate.

How Secure Are The Dividends?

The high yields offered in this sector can be tempting, but high yields such as Frontier's can be a signal of bad things to come, specifically dividend cuts. So how safe are the dividends of each company? 

 

Frontier's dividend yield has been erratic, to say the least, over the past few years compared to the steady yields of AT&T and Verizon. However, despite these high yields Frontier actually has the highest dividend cover in the group - sometimes as high as 7 times!

Currently all of these companies are able to cover their dividends just 1.5 times from current EPS. 

Dividend Paid
Year VERIZON AT&T FRONTIER
2008 $1.00 $1.00 $1.00
2009 $1.86 $1.64 $1.00
2010 $1.91 $1.68 $0.88
2011 $1.96 $1.72 $0.75
2012 $2.02 $1.76 $0.40

Frontier has been cutting its dividend per share since 2008. Verizon and AT&T, on the other hand, have been increasing their dividend over the same period; although it must be noted that at some points they have hardly been able to cover their dividends. More often than not, AT&T and Verizon have had a lower dividend cover than Frontier.

Despite decreasing the dividend, Frontier has actually been maintaining the same total dividend paid. (See Frontier's Problem below). So in this case Frontier actually had the best dividend cover and total payout.

How Do Earnings Compare?

So Frontier's dividend is strong and well-covered, but how do earnings compare?

Frontier's EPS is moving roughly in-line with both of its competitors. Although in the middle of 2011 Frontier's EPS suddenly drop from $3.50 to just under $1, the reason for this is once again revealed at the bottom of this article.

Verizon, on the other hand, has had the most stable EPS over the longer term - albeit declining. Like Frontier, AT&T has seen the same kind of erratic EPS.

What About Return On Shareholder Equity?

 Return on shareholder equity - a key measure of how well the company is performing for its shareholders. How do these three compare?

Once again Frontier is the main winner, producing some of the best returns on shareholder equity over the past 5-year period. Although, now the company is making a return similar to both of its competitors. Still the return is roughly the same across all three over the past 5 years. 

Frontier's Problem

The main issue with Frontier has been its constant issuing of shares to bolster finances, which has depressed EPS and the share price, and has forced the company to reduce the dividend.

The figures on the chart indicate how many shares are in issue at any given time. With the number of shares in issue growing, the company's EPS has been driven downwards. Unfortunately, shareholders who brought Frontier's shares back in 2008 have seen the majority of their capital wiped out as the huge number of Frontier's shares in issue continues to grow. There has been no share split over this period, according to Frontier's website, so these share have been issued to boost the company's finances.

Working off the fact that there were 14 billion shares in issue in 2008 when the EPS were $2, and today there are roughly 3 times as many shares in issue with an EPS of $1, without the huge increase in shares the company would have an EPS of $3.10.

Factor this in with historic dividend payments amounting to roughly 80% of EPS, then todays dividend, without the increase in shares, would be equal to $2.50 - the highest payout in the group.

Finally

In conclusion, all three of these telecoms stocks have their own individual strengths, but the winner has to be Frontier. The company would have outperformed if it had not completely diluted its share stock. So with that in mind, the best stock to invest in cannot be Frontier--it'll have to be the next best performer, Verizon

Verizon has a good blend of EPS stability, value, a strong, well-covered, consistent dividend, and decent returns on shareholder equity. The company may not have the largest yield in the group, but I believe that is due to its dividend strength and predictable EPS. Verizon is the long term telecom stock to own.


RupertHargreav 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!

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