After spending a bit of time analysing the technology communications (domestic) industry I believe that AT&T (NYSE:T) will be a good future investment for the coming years as it will be able to outcompete its main competitor Verizon Communications (NYSE:VZ) and increase its market share lead and profits against the company with or without either acquiring Yahoo.
Verizon Communications has been in the process of acquiring interesting purchases into the ad-revenue business. It has acquired AOL, microsoft advertisement businesses and is attempting to acquire Yahoo. Both previous acquisitions seemed to have favoured the seller rather than Verizon (a high price for low market share companies in exchange for potential into the ad-revenue industry). This is because the company is trying to go into more profitable waters since the telecom industry is slowly loosing revenue growth and Verizon is desperate in finding more Operating Cash Flow. The potential acquisition of Yahoo may mean an increase in revenue and cash flow but the pay off of high debt seems risky.
Verizon shares have been in an upward trend after the quarterly earnings seeming promising (despite strikes after unresolved tension with Unions over plans to move 5,000 jobs abroad for lower wages). It has also been working on a video streaming platform which has turned out worse than expected, it was noted that Go90 is in “very early stages of gaining traction and engagement.”in the last Quarter conference call.
AT&T on the other hand has been doing some similar acquisitions to move into other industries such as DirecTV and Nextell Mexico. AT&T seems to be also playing shrewd moves into the video streaming business, rumours fly that it may be looking to launch a rival against Netflix (NASDAQ:NFLX). Despite these purchases in 2015, they have a substantially lower D/E ratio of 1.06 against Verizon’s 4.56. Verizon also has a far higher P/B value of 11 against AT&T’s 1.94. On the other hand AT&T has a higher P/E ratio than Verizon of 17.20 against 11.46. Both on the bright side pay high dividends of 4%. An important factor for me is that the Operating Cash Flow of AT&T is substantially higher and has been historically meaning even lower risk against Verizon. An often overlooked factor of human capital also favours AT&T.
In conclusion, I feel as though Verizon is playing a gambit which may pay-off marginally in the short term, but with substantially higher leverage than AT&T (and AT&T having its own gambit with seemingly higher upside) it will have a tough-time in the long run. Both seem on the surface to be safe and healthy long term dividend investments but I would feel far more comforted putting my money into AT&T rather than Verizon despite the current market trend.