1 Reason to Fear for AT&T and Verizon’s Dividends

Source: The Motley Fool.

The increasingly caustic war for customers in the wireless industry has become so heated that shareholders in both Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) , two of the highest-yielding dividend stocks on the S&P 500 (SNPINDEX: ^GSPC  ) , would be excused for wondering if their quarterly dividend checks are under threat. According to a recent Reuters article, "New Year's rivalry among U.S. mobile operators has Wall Street worried that the industry's profits could seriously decline."

A timeline of mobile conflict
The opening salvo in the competition for customers was fired by T-Mobile in March of last year, when the nation's fourth largest mobile carrier did away with two-year contracts. Instead of paying a hefty upfront fee for a smartphone, customers under its Simple Choice Plan were given the option of paying monthly installments for their phones along with a data, text, and voice plan.

"These bold moves serve notice that T-Mobile is canceling its membership in the out-of-touch wireless club," John Legere, president and CEO of T-Mobile USA, said at the time.

T-Mobile followed this up in July by announcing its JUMP plan, which enables customers to upgrade their phones up to twice a year as opposed to waiting until the expiration of their service contract as at AT&T and Verizon. According to T-Mobile's website:

Customers can upgrade to a new phone, financed through T-Mobile's Equipment Installment Program (EIP), twice every 12 months after they've been in the JUMP! program for six months. Simply trade in an eligible T-Mobile phone in good working condition at a participating store location. Any remaining EIP payments will be eliminated, and current customers can purchase new phones for the same upfront pricing as new customers, with device financing and Simple Choice Plan, a no-annual-service contract.

AT&T responded to the move one week later by releasing its Next plan. Under the program, customers pay monthly installments for new devices in lieu of a down payment. And after a year of doing so, they can trade in their old device for a new one.

"With AT&T Next, customers can get the newest smartphone or tablet every year with no down payment." said Ralph de la Vega, president and CEO of AT&T Mobility. "That's hard to beat, and it's an incredible value for customers who want the latest and greatest every year."

In October, T-Mobile upped the ante by eliminating roaming and international data-use charges. Beginning at the end of that month, the company expanded its home data coverage to more than 100 countries, meaning that subscribers to its Simple Choice Plan will pay no additional fees for text and data services abroad. For voice calls meanwhile, users will incur charges of $0.20 a minute.

And two final moves by the companies this year show that the back-and-forth is far from over.

On Jan. 3, AT&T began offering to pay T-Mobile customers $450 in credit if they jumped ship. The first $250 in credit is for trading in an old phone, the precise value of which will depend on type and condition of the device. They can then get an additional $200 in credit by signing up for either the Next plan or the Mobile Share Value plan, its contract-free plan.

Finally, and most recently, T-Mobile announced at the annual Consumer Electronics Show in Las Vegas last week that it will cover exit costs for customers abandoning AT&T.

Will this affect the industry's dividends?
At some point, something has got to give. While Verizon has yet to join the fray, analysts are speculating that it will be forced to react sooner rather than later. This will further intensify the competition and, at least presumably, drive down profitability in the sector.

It is, of course, too early to say whether the added pressure will be so great as to require a dividend cut from either AT&T or Verizon, both of which are favorites among income investors thanks to their generous yields, but it isn't too early for current and prospective investors to start preparing for such a contingency.

The war for customers in the mobile industry isn't going away anytime soon.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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