Why AT&T Is the Best Buy in the Telecom Sector

No other wireless provider matches AT&T’s potent mix of dividend prowess and strategic positioning.

Andrew Tonner
Andrew Tonner
Jun 5, 2017 at 9:23AM
Technology and Telecom

Finding the best telecom stock on the market today is a matter of process of elimination. 

Smaller wireless providers such as Sprint and T-Mobile don't pay dividends, instead reinvesting all of their profits and excess cash flows back into their businesses. Since many telecom investors target the sector for its rich history of cash distributions, we can strike these two from the list.

Without turning to international wireless stocks, we find that telecom giants AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) offer the same 5.1% dividend yield. So deciding between these two wireless rivals comes down to which offers the better growth prospects. The winner on that front is AT&T. Let's see why.

AT&T: The best dividend stock in telecom today

No other telecom comes close to AT&T's credentials as a dividend stock, though Verizon deserves credit for its high yield. AT&T's track record of consistently growing its payouts stands head and shoulders above its industry counterparts.

The company has increased its annual dividend per share for an impressive 32 years running, earning it the much-desired title of a Dividend Aristocrat. It already increased its annual payout for 2017, raising its quarterly cash distribution from $0.48 to $0.49 per share. 

Though it's grown its payouts in steady annual intervals for longer than I've been alive, the company has grown its dividends at a fairly glacial pace. As I noted in another piece, AT&T's dividend's compound average growth rate totaled a meager 3.2% over the past decade. 

However, the company claims its pending acquisition of Time Warner -- more on that in a moment -- will be accretive to its adjusted EPS, free cash flow, and dividend payout coverage this year, assuming the deal closes on time. Given AT&T's 95% dividend payout ratio, this news should comfort income investors.

Better still, AT&T's purchase of Time Warner will provide the company with even more significant competitive advantages to shape the converging future of the telecom and media industries.

A telecom worker stands next to a cell tower on top of a building.

Image source: Getty Images.

Buying its way into the future

In addition to its prominence as an income investment, AT&T has a good chance to grow faster than the industry averages in the coming years, in part thanks to the leadership position it should be able to establish in bringing cable TV services onto wireless networks.

The key lies in AT&T's pending acquisition of Time Warner. The $85.4 billion cash-and-stock deal is expected to close by the end of the year as most critical regulatory hurdles have been cleared. With Time Warner added into its corporate fold, only AT&T and Comcast (NASDAQ: CMCSA) will own the requisite mix of content assets and wireless spectrum necessary to drive this trend forward.

As one of the largest wireless providers in the country, AT&T has a national wireless network that's already well positioned in terms of its spectrum bandwidth ownership and cell-tower deployments. The company will need to continue to invest in faster wireless standards such as 5G, but the company is well under way in its preparations to bring 5G to mainstream deployment, starting as soon as this year.  

Time Warner also factors into this strategy, in terms of content rights. Along with Comcast, AT&T stands to considerably strengthen its competitive position by launching an over-the-top wireless cable service. It seems likely the company will combine a new wireless cable service with its current cellular, internet, and other services to create a highly competitive bundle that peers such as Verizon, Sprint, and T-Mobile will struggle to replicate.

The advantage of having Time Warner is that it should allow AT&T to secure the over-the-top broadcast rights from other cable providers that might otherwise be leery of allowing AT&T to become so powerful.

One useful example is Comcast, which provides cable subscriptions to 22.4 million consumers and owns networks such as NBC, Bravo, and USA Network. Though Comcast will probably launch its own wireless cable offering, AT&T could gain a first-mover advantage if it beats the cable giant to market. While that might give Comcast an incentive to withhold over-the-top rights from AT&T, that situation probably wouldn't last since Comcast also needs Time Warner's content assets for its current cable offerings and to eventually launch its own service and if AT&T owns them, that would forces the rivals to the negotiating table.

This all involves a fair amount of speculation on my part, though it seems like a logical set of steps for the parties involved. Time Warner should allow AT&T to take a leadership position in the next era of the cable business, which should allow it to grow its earnings and dividends in the years to come.