Major market players including Verizon (NYSE:VZ) and AT&T (NYSE:T), along with newer competitors including Frontier Communications (NASDAQ:FTR), operate in a very different space than the top telecom stocks did even a decade ago. The top telecommunications stocks no longer succeed or fail based on landlines, even though, at differing levels, AT&T, Verizon, and Frontier still sell them.
Instead, the industry has gone wireless, and diversified. To judge the top-telecom stocks, you need to look at everything from cable and internet sales to wireless phone subscriber base, though Frontier only offers the first two, while wired phones -- landlines as they're now known -- have become a relic of the past.
There are, of course, other players in the space, but Verizon and AT&T are the top-two telecom stocks, while Frontier has been making some interesting moves.
The case for the big two
In some ways, AT&T and Verizon dominate the telecom space. Even if you discount their traditional phone lines as a relic of the past, the two companies are also No. 1 and No. 2 in wireless, while AT&T, which owns DirecTV, also has the most pay-television customers of any single company.
In addition to being attractive stocks simply due to the size of their recurring revenue bases, both AT&T and Verizon also pay steadily increasing dividends. These are stocks on the rise -- as you can see on the chart above -- which also return money to investors.
The challenge facing anyone willing to buy these two top telecom stocks is simply the negative headwinds facing the entire industry. Landlines are a dying business. It may be a slow death, but nobody under the age of 30 has a landline, for the most part, and eventually, the people who do will die off.
AT&T and Verizon also both have significant risk in the wireless market, where for years they've used having superior networks as a way to justify higher prices. That's becoming less and less true. While the public has been slow to catch on, the day will come when people either leave these carriers, or AT&T and Verizon have to lower prices.
In addition, while the broadband business remains lucrative, pay-television has been under assault. Cord-cutting -- people dropping traditional cable in favor of streaming services -- has not yet had a major effect, but it certainly could push pay-TV providers to lower prices, while offering customers more flexibility.
Frontier is all about upside?
Historically, Frontier has been a small-time player, and not a top telecom stock. Recently, however, the company has made moves to grow -- the biggest one being its recent $10.54 billion purchase of Verizon's wireline operations in California, Texas, and Florida. The acquired businesses include approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers. That deal followed a smaller one where it bought wireline customers from AT&T in Connecticut.
Frontier faces all the same challenges its bigger rivals do -- except it does not offer wireless service -- but it has more upside. The smaller company also pays a dividend, and its stock trades at a much-cheaper price than its rivals.
This is a play for investors if they believe that consumers want choice when it comes to cable and internet providers. Frontier operates as an alternative choice in all its markets, usually offering service at a lower price. That could make it attractive to people who want to save money, but don't want to fully cut the cord.
Nothing is changing fast
While Frontier has a higher risk/reward factor than AT&T and Verizon, it's probably too much risk for most people. The company has taken on a lot of debt, and it has not shown an ability to hold onto subscribers -- let alone add them.
AT&T and Verizon, on the other hand, have shown solid gains in internet, while protecting their turf from lower-priced carriers in wireless, and showing surprising resilience on the pay-television side. Ultimately all of the pressures facing those business may drag these companies down; but for the near term, both remain top telecom stocks.
Daniel Kline has no position in any stocks mentioned. He is trying to get rid of his farmer's tan, but has learned a tank top may not be his best look. The Motley Fool owns shares of and recommends Verizon Communications. 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.