Telecom stocks come in all risk and potential reward flavors. In one corner, you have the incumbent local exchange carriers like Frontier Communications (FTR +0.00%): hungry regional players trying to stay afloat in an era where smartphones are replacing landlines and even corporate communication systems. In the other corner, you have the behemoths, led by AT&T (T 3.21%) and its massive push into satellite television and content.
Pitting Frontier against AT&T may not seem like much of a fight, but both stocks are presently out of favor. Frontier has taken a beating, and its move to suspended its previously juicy payouts in February has effectively chased away income investors. The stock has shed more than half of its value over the past year. AT&T is holding up relatively better, but it's still hanging on to a double-digit percentage loss this year, trading 11% lower year to date (and that includes its chunky quarterly dividend checks). Neither stock is perfect, though one is clearly more imperfect than the other. Let's size up both out-of-favor carriers to see which one is worthy of your portfolio.
Image source: Frontier Communications.
How these telecoms stack up
Frontier Communications is in a bad place right now. It has rattled off 14 consecutive quarterly deficits attributable to its shareholders, and analysts don't see a return to profitability anytime soon. Revenue continues to decline both sequentially and year over year. Subscribers keep bolting: Its total accounts have shrunk to 4.667 million from 5.058 million a year earlier. Frontier is experiencing defections from both consumers and corporate customers.
AT&T may not be the picture of organic growth. Operating revenue has declined slightly for seven straight quarters. However, AT&T remains very profitable, shells out a sustainable dividend every three months, and it actually boosted its bottom-line guidance in its latest quarter.
Neither company is -- pardon the pun -- phoning it in. Frontier and AT&T have turned to beefy acquisitions to find new outlets for growth. As bad as things appear for Frontier, it could actually be a lot worse. It has just completed its plan to realize $350 million in cost-saving synergies, and it's targeting enhancements that could boost annual EBITDA by $500 million come the end of 2020. AT&T has made some huge acquisitions, including DIRECTV and more recently closing on its purchase of Time Warner.
I know where I'm siding on this debate of which stock is the better buy. I became an AT&T shareholder earlier this year, and as the stock declined, I added to the position. The yield now stands just north of 6%, and AT&T is making more than enough money to keep its distributions going and growing. Frontier is taking some painful yet necessary steps to preserve capital, but there's only so much money you can squeeze out of operations when customers are moving on. It will be great if Frontier can crank out $500 million more in EBITDA in two years, but will that be enough to offset its iffy fundamentals? There is some appeal for risk-tolerant investors to buy into Frontier, but AT&T is where a chunky yield will reward patient investors as the telco giant puts its huge puzzle pieces together in the coming years.
