Dividends. They are the backbone of any well-constructed retirement portfolio. For many, these quarterly payouts come from strong, stable businesses with wide moats -- and for the last fifty years, telecoms have been a gold-mine. Even though the advent of the Internet and the death of landlines have changed the landscape dramatically, they haven't changed one important thing: major telecoms still offer monster dividends.
Frontier currently offers a jaw-dropping 28% dividend yield. Does that make it too good to be true? While it's impossible to tell the future with 100% certainty, there are three lenses through which we can compare the two companies to come to our own conclusions.
Sustainable competitive advantages
There's nothing more important for long-term, buy-to-hold investors to study than an underlying company's sustainable competitive advantage -- otherwise known as a "moat." At its core, a moat is what separates a company from the competition. It keeps customers coming back year after year, while holding the competition at bay for decades.
Both of these companies benefit from high barriers to entry from a regulatory and capital standpoint. It takes billions of dollars and decades of work to build up the infrastructure necessary to become a national telecom. But because both of these companies benefit -- to varying levels -- from this moat, it really isn't a differentiator.
Instead, I'd note that AT&T would get the nod here for three reasons. First, it has a very valuable brand, worth $37 billion and ranked 12th nationally by Forbes. Second, it has been able to parlay that brand awareness into huge market-share: currently, Statista estimates that AT&T comes in a close second in nation wireless subscriptions with a 33.1% share. Finally, the company is diversifying itself into a full media play -- notably through the acquisitions of DIRECTV and its (admittedly now-endangered) attempt to acquire Time Warner.
Frontier comes up short on all three fronts. Its brand's value is far less; in fact, the company has done an infamously terrible job of providing service in some of its newest markets lately. Its market-share is nothing to write home about. And the fact that Frontier is relying on providing cable services in some markets has made the cord-cutting trend nearly fatal for the company's balance sheet.
Winner = AT&T
Most dividend investors love seeing excess cash returned to them in quarterly payouts. But there's something to be said for keeping a cash stash on hand as well.
That's because every company, at some point or another, is going to experience difficult economic circumstances. Those that have cash on hand can actually emerge stronger by buying back shares on the cheap, acquiring rivals, or simply outspending the competition to gain long-term market share.
Those heavily in debt are in the opposite boat, forced to do anything just to stay afloat. Keeping in mind that AT&T is valued at over 350 times the size of Frontier, here's how the two stack up.
|Cash||Debt||Net Income||Free Cash Flow|
|AT&T||$50 billion||$155 billion||$13 billion||$17 billion|
|Frontier||$286 million||$18 billion||($1 billion)||$682 million|
This is another easy win for AT&T. Telecoms commonly carry more debt than cash, but the level to which Frontier is levered is dangerous. Most of that comes from acquisitions the company has made in recent years to gain exposure to cable and broadband networks. But those moves haven't worked out well at all.
Winner = AT&T
Finally, we have the maddening task of trying to figure out how "expensive" each stock is. While there's no one metric that can answer this question, there are a number of data points that I like to consult when evaluating dividend payers. Here are four of my favorite.
|Company||P/E||P/FCF||Dividend Yield||FCF Payout Ratio|
What's amazing is that Frontier cut its dividend earlier this year, but still has a huge yield. At the same time, it seems priced to go out of business. In my seven years writing for the Fool, I've never seen a company with a history of positive free cash flow trading so low. That doesn't mean that I think Frontier is a steal, but the valuation is certainly favorable.
Right now, AT&T isn't too expensive either, but any sign of positive news could send Frontier shares soaring from this level.
Winner = Frontier
And my winner is...
So there you have it: AT&T's healthy balance sheet and wider moat are much more valuable than Frontier's current low valuation. That doesn't necessarily mean that I'm running out to buy shares -- or even make a positive CAPS call. While I think AT&T is better situated, I have a hard time seeing where the moat for the company will be moving forward as wireless and broadband subscriptions become more and more commoditized. If forced to choose, though, AT&T would definitely be my choice.