Telecoms-01-Dividend growth investing

AT&T or Verizon – which might be a better near-term investment?

Which of the heavyweights is best?

In this post, we take a very quick look at the near-term (until the end of 2024) investment prospects for AT&T (T) and Verizon (VZ). They are comparable firms and close competitors in a very competitive industry that is geared towards large capital expenditures to ready itself for the 5G revolution. In general, however, I would say that Verizon has performed a better job of being a good compounded and presenting healthy, albeit slow and steady, dividend growth. These traits of reliable growth are important to me.

AT&T

Following the recent spin-off of the WBD media arm of AT&T, the remaining firm should now be well focused on the core telecommunications business. Given the management’s poor track record of focus and execution, whether they can leverage the present situation is an open question!

The firm had a good history of increasing dividends prior to the spin-off. At the time of the spin-off, however, they could pass a large chunk of debt to the WBD entity and they reduced their own dividend. T now provides a better dividend coverage, though, and is left in a healthier financial position although they still face a heavy debt burden.

Dividends

T has a yield of 6.12% and, after the spin-off, it is unclear how fast the dividend will grow, but the analyst estimates I have seen suggest negligible expectations of dividend growth in the near term.

Financial health

Both the current ratio and quick ratio are looking unfavorable, with an interest coverage ratio of 4.5 being sufficient, for the time being.

Morningstar rates T as a “C” for financial health.

Outlook

If we take the analyst expectations until the end of 2024, and use the lowest expected PE ratio, based on the last year, if T returns to this PE ratio and the expectations for EPS growth are met, then T will experience a strong increase in price, coupled with dividends received, to give a total annualized rate of return of approximately 23%. Are these estimates reasonable? Analysts have traditionally found it difficult to forest EPS for T. However, recent revisions have been moderately favorable to T.

T-2022-08-Analyst estimates for dividend growth investors
Figure 1. AT&T Analyst estimates for dividend growth investors. (Source: Fast Graphs)

Verizon – a steady grower?

Verizon has been steadily growing its business. The recent roll-out of 5G infrastructure has been weighing heavily on expected CAPEX in the future.

Dividends

VZ presently pays a 5.8% dividend yield. It has traditionally grown the dividend by about 2% per year, with $2.59/share expected dividends in 2022, growing to expectations of $2.69/share in 2024. Slow and steady. Notably, this DGR does not keep up with inflation.

Financial health

Morningstar rates VZ as a “B” for financial health. The current ratio and quick ratios are both below 1 and comparable to T’s situation. However, VZ has a 9.8x interest coverage ratio, providing a more sustainable outlook.

Outlook

The outlook is slow growth in both EPS and dividends for VZ (Figure 2). based on the lowest PE ratio, again, based on the last year, if VZ reaches this level and the EPS estimates are accurate, but the end of 2024 the increases in price to ensure this happens will mean a 17% annualized rate of return, comprising both healthy price increases and dividend accumulation.

VZ-2022-08-analyst estimates for dividend growth investors
Figure 2. VZ Analyst estimates for dividend growth investors. (Source: Fast Graphs)

Thesis

So – which of these opportunities is going to be more attractive to the dividend growth investor (DGI)? Arguably, AT&T has already burned many DGIs because of the spin-off and dividend cut, and their expectations for negligible if any dividend growth is also something to consider.

From my perspective, VZ appears to have a slightly better financial position, has traditionally been easier for analysts to estimate the EPS for, and has some (albeit small) dividend growth. Therefore, a healthy 17% annualized rate of return expected for VZ wins my vote today!

Which of the heavyweights is best? In this post, we take a very quick look at the near-term (until the end of 2024) investment prospects for AT&T (T) and Verizon (VZ). They are comparable firms and close competitors in a very competitive industry that is geared towards large capital expenditures to ready itself for the…

Which of the heavyweights is best? In this post, we take a very quick look at the near-term (until the end of 2024) investment prospects for AT&T (T) and Verizon (VZ). They are comparable firms and close competitors in a very competitive industry that is geared towards large capital expenditures to ready itself for the…

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