Fans of high yields, mergers-and-acquisitions drama, and desperate players trying to slow their paths to irrelevance are no strangers to telco stocks. The telecommunications industry is in a funk. Landline and cable television customers are cutting the cord, and the mobile market is starting to become more cutthroat as carriers cope with slowing growth.
AT&T (NYSE:T) and CenturyLink (NYSE:CTL) are survivors because they're still here, but also because they've been making shrewd moves to keep growing. AT&T and CenturyLink have taken advantage of sector consolidation, but they've also been aggressive in eyeing diversification opportunities outside of their core businesses. Both investments come battered in risk, but also deep-fried in opportunities if their strategies pay off. Let's size up the two telcos to see which one is right for you.
Making the right call
AT&T is in the news a lot these days. The Department of Justice is throwing legal challenges at AT&T's $85 billion deal for Time Warner (NYSE:TWX.DL), and the parties will head into court next month. AT&T has gobbled up smaller cellular companies in the past, and made a big push into satellite television with its $48.5 billion deal for DIRECTV. Now it's bumping up into some regulatory resistance as it tries to play the content game.
CenturyLink hasn't faced the same kinds of antitrust roadblocks. It's much smaller, so it wasn't a big deal when it gobbled up Embarq, Qwest, Tier 3, and most recently, in a $25 billion deal, Level 3 Communications. AT&T would look great with HBO and some of Time Warner's other properties in its arsenal, but the combination is far from a sure thing at this point. Meanwhile CenturyLink's deal for Level 3 finds it landing its next CEO, as well as expanding deeper into steadier business customers that will account for 75% of the core revenue at CenturyLink -- and that's before even considering the $850 million in operational synergies it expects to realize in the next three years.
When it comes to valuation, AT&T commands the lower earnings multiple, at 11 times this year's projected earnings, compared to a still reasonable multiple of 14 at CenturyLink. However, organic growth remains a concern for both entities.
Mobile isn't dead. The push for 5G could raise the bar on pricing and efficiency, and let's not forget that this year's tax cuts should help make mobile phone plans affordable for a wider audience. Pay TV has turned to cheaper streaming solutions, but those still require fast and reliable broadband, which AT&T and CenturyLink offer.
The two stocks are out of favor, and that has helped push their yields higher. CenturyLink stock has experienced three years of sharp declines, but it has not, incredibly, slashed its dividend since 2013. Its 12.6% yield turns heads, even if AT&T's 5.5% is no slouch. AT&T's rate is naturally more sustainable.
The better buy
While I own shares in AT&T, that doesn't mean that I'm giving it the nod here -- I'm actually going the other way. CenturyLink is the riskier bet, but it packs the most upside with its transformational deal of Level 3 in the rearview mirror; a dividend cut seems inevitable, but it still has the best chance at ringing up big gains.
If AT&T completes its deal for Time Warner I may revisit this pick, but given the cards on the table right now, CenturyLink looks like a better buy.