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With a Recession Possibly on the Way, Are AT&T and Verizon Buys?

By Nicholas Rossolillo - Nov 2, 2019 at 5:41PM

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The real strength for both businesses is wireless service, and doubling down on it should yield results.

The third quarter of 2019 is now in the books for America's No. 1 and No. 2 wireless companies, Verizon (VZ 2.03%) and AT&T (T 2.02%). It's been nearly a decade since the two telecoms started rolling out 4G technology, and while net new connections have certainly slowed down, it's still the best thing going for both of them. The numbers in Q3 were mixed, but it certainly wasn't wireless service's fault.

The good news is that Verizon and AT&T are both working to clean up their acts after a few years of dubious media business investments and gearing up to double down on what they do best. A recession may be nigh, though -- just in time for the ramp-up in 5G network deployment. Nevertheless, these two dividend juggernauts still look like solid bets no matter what's in store for the economy in the next year.

Four young people standing against a red wall and using smartphones.

Image source: Getty Images.

A mess hiding core strength

First, let's break down the numbers. Verizon added net new 601,000 retail post-paid wireless connections in Q3 -- made up of 193,000 consumer additions and 408,000 business additions -- building on its big lead as the largest carrier in the U.S. That equated to a 0.9% year-over-year increase in revenue as lower wireless equipment sales, cable TV losses, and the Media Group (made up of the acquired AOL and Yahoo! assets) offset the strong mobile results.

As for AT&T, its Q3 revenues fell 1.1% year over year, with declines in cable TV, wireline, and its WarnerMedia acquisition from last year offsetting strength in its wireless and managed business services. The company reported net 255,000 new wireless additions, also building on its momentum from the first half of the year. Despite worry over a slowing economy, demand for wireless services is reaccelerating.

Despite the mixed bag, Verizon and AT&T both notched adjusted earnings per share increases; Verizon was up 2.5% and AT&T was up 4.4%, all while both continued to invest in 5G rollout and AT&T specifically was busy spending to prepare its new streaming service, HBO Max.

Cash flow, debt repayment, and dividends

More important than earnings, though, is free cash flow (basic cash profits after operating and capital expenditures are paid for), from which the two telecom giants can pay out dividends and reduce their substantial debt burdens. Verizon's trailing-12-month free cash flow is up 7% from a year ago to $17.5 billion, while AT&T's is up 27% to $29.1 billion -- thanks in part to some asset sales earlier this year.

It's a good thing, too, as both are laden with large debts -- Verizon from its purchase of AOL and Yahoo! and AT&T from buying DirecTV and Time Warner. Too much debt is the last thing a business needs if the economy is about to go off a cliff. Both overpaid for the businesses, which haven't done much to move the needle. Verizon has $109.6 billion in debt on the books and AT&T $165.2 billion. Progress is being made, though. Year to date, Verizon has paid down $3.5 billion in debt, and AT&T has reduced its burden by $12.7 billion.

It's a solid start, but more work is needed, especially at AT&T. The company recently unveiled its new three-year plan to pay off all of the debt and repurchase 70% of the new shares it issued to acquire Time Warner (the total bill was a whopping $85 billion) in 2018. Offloading the troubled DirecTV could be part of the plan -- although AT&T will likely take a loss in doing so. But it should help the telecom sharpen its focus on what's working best.

Verizon, for its part, has a bit more flexibility, as its liabilities are smaller, and it is charging forward with its 5G plans. It has begun to sell mobile and home internet on its new network in a handful of cities, but one of the most promising uses for 5G is for businesses. The company recently showed off a Corning (GLW -1.45%) fiber-optic cable factory it is powering with the ultra-fast network to increase efficiency and monitor quality control. New deals like this could be largely responsible for Verizon adding so many new subscribers in the quarters ahead.

All of this means that, recession or not, Verizon and AT&T are a more integral part of the economy than ever before. Things aren't perfect, but business is stable, and the bread-and-butter wireless operations are far from finished growing. Toting dividend yields of 4.1% and 5.4%, respectively, these two stocks are still solid picks for investors looking for income.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$21.16 (2.02%) $0.42
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.68 (2.03%) $1.01
Corning Incorporated Stock Quote
Corning Incorporated
GLW
$33.27 (-1.45%) $0.49

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