After the Federal Communications Commission approved a $64.7 billion merger between Bell Atlantic and GTE Corp. in 2000, Verizon Communications (VZ 0.74%) was born. It became the largest local telephone company in the United States, serving 25 million mobile phone customers in 40 states. Verizon became a highly anticipated IPO for investors.
Holding Verizon for two decades
The first day of trading for Verizon Communications was July 3, 2000, with an IPO price set to $45.53 per share. An investor purchasing $10,000 of Verizon stock at the IPO would have 220 shares. Fast-forward to today, and Verizon is currently trading at $60.81 per share. A shareholder with 220 shares would have received $8,080 in dividends and a stock appreciation of $3,378 -- totaling $11,458, a 114.58% return on investment over the period of 19 years. Investors would have a compound annual growth rate (CAGR) of 1.53% not including dividends -- 2.69 percentage points below the S&P 500's CAGR of 4.22% during the same period.
That 114% return over 19 years has been a solid run for a large, established company (although the S&P 500 rose 121% over the same time frame). And there are indications that the company can continue to show growth. But is it a stock for IPO shareholders to continue holding onto?
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Industry consolidation
Nomura Instinet and HSBC Securities downgraded Verizon in November 2019 for several reasons -- mainly pointing to a potential price war between Verizon and the competition. After the Department of Justice approved a merger between Sprint (S +0.00%) and T-Mobile US (TMUS +0.54%), Nomura and HSBC became concerned over a "race to the bottom," in which companies lower pricing to beat out each other -- and ending in very cheap unlimited plans offered to customers with small profit margins to sustain the business. AT&T (T 1.21%) fired the first shot at Verizon, announcing a price reduction on unlimited plans $5 cheaper than Verizon's unlimited plan.
The merger between Sprint and T-Mobile US will increase the competition for Verizon, as the company is currently serving 150 million customers in the United States -- which is 9 million more than AT&T's 141 million and 24 million more than the combined total of 126 million from the upcoming merger of Sprint and T-Mobile US. Competing for customers will be a daily battle that will rely on pricing, network speeds, and network availability.
A head-to-head comparison
Income investors will be keeping an eye on the performance of the two largest telecommunications providers: Verizon and AT&T. The company with the better forward dividend yield, price to earnings, and price to sales is currently AT&T. Verizon has a forward dividend yield of 4.02% versus AT&T's 5.32%, a forward price to earnings ratio of 12.7, which is higher than AT&T's 10.85, and a price to sales ratio of 1.93 over AT&T's 1.55. These fundamentals show a stronger case for owning AT&T than Verizon in the near term.
An investor holding 220 shares of Verizon will want to consider diversifying the holding and perhaps consider purchasing shares of AT&T if they want to continue investing in the sector as it is currently capturing a higher dividend yield and a better value. As the investments in 5G start to blossom, investors will see an increase in revenues from Verizon in 2021. However, AT&T is investing in 5G network speeds alongside Verizon.
In addition, AT&T has an advantage over Verizon, as AT&T is investing heavily in streaming by acquiring DIRECTV in 2015 and Time Warner in 2018 -- increasing revenue diversification.
Verizon's lack of revenue diversity puts pressure on growth during an industry consolidation and a potential price war, which hampers earnings-per-share growth. Verizon's forward dividend yield of 4.02% is great for income investors; however, AT&T's yield of 5.32% is better.
