The Federal Aviation Administration (FAA) just authorized AT&T (T +0.42%) and Verizon (VZ 0.49%) to turn on more 5G network towers.
Fear of interference with aircraft instrumentation has led to "dead zones" around certain airports as the regulatory body blocked the wireless providers from utilizing their new systems. But getting more precise cell-tower location data allowed the FAA to let the carriers fire up more towers while balancing the safety of aircraft flying in the vicinity.
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5G networks are going to be where the wireless battles occur in the immediate future and being able to fully utilize the networks the carriers have been buying up and rolling out will be key to who gains the upper hand in the space.
Having the competitive edge is an important question for investors because the U.S. telecom market is heavily saturated, with 97% of Americans owning a mobile phone and 75% having a smartphone. Mobile accounts for 50% or more of all web traffic. It means market-share wins by one carrier will necessarily come at the expense of rivals, so let's see if AT&T or Verizon is the better buy.
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AT&T has a lot of moving parts
AT&T is preparing for the future. It's been aggressively buying up spectrum at auction and spent $23 billion to acquire over 1,600 C-band spectrum licenses early last year. Then in the Fall, it spent billions more to acquire 40 megahertz (MHz) of the 3.45 gigahertz (GHz) spectrum. Several years ago it spent tens of billions of dollars on AWS-3 spectrum, and has been the biggest spender each time.
AT&T now owns roughly the same amount of spectrum below 6 GHz as Verizon does, a key consideration because that's where the early stages of 5G will be launched. It will provide connectivity for Internet of Things devices, as well as for critical communications, including automotive applications.
Yet AT&T still has to unwind past bad business decisions, acquisitions that saddled it with so much debt it neglected investing in its future tech infrastructure until it was almost too late. The company is also expected to wrap up its divestiture of the 71% stake in WarnerMedia it owns through a merger with Discovery in the second quarter, but it's still unknown whether it will split off the division or spin it off.
CEO John Stankey wants to retire as many shares as possible following the deal, which a split would allow, but he'd probably have to pay a premium to shareholders. A spin-off would be simpler, and he told analysts he also needs to be mindful of the large body of retail investors who own stock to ensure they also receive value out of it. Because the deal will result in AT&T's dividend getting slashed, getting it right is paramount.
Despite the coming payout cut, AT&T will still be spending between $8 billion and $9 billion on its dividend, and the yield will still be nearly 5%, keeping the payout at the upper end of what much of the rest of corporate America is paying. .
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Verizon under competitive pressure
While AT&T may be catching up in sub-6 GHz spectrum, Verizon remains the one to beat. It has a decided lead in millimeter-wave spectrum, which will ultimately be where the industry ends up. It enables operators to offer peak rates of up to 20 gigabytes per second and very high hotspot capacity.
Verizon continues to expand its home-internet offerings in anticipation of the eventual full rollout of 5G and is in over 200 markets across 50 states with its 5G Home. It plans to be in 30 million homes by 2023 and 50 million by 2025.
But competition from AT&T and T-Mobile is only going to become more intense as more C-band spectrum comes online. Wall Street expects Verizon will post subscriber losses in the coming first quarter, already a seasonally slow period.
Part of Verizon's concern is that, before the C-band can be fully operational, existing satellite operators utilizing the spectrum have to move to a different spectrum. That won't fully happen until 2023 and precludes Verizon from getting up and running until then.
Verizon dropped out of the bidding for licenses in the 3.45 GHz spectrum in which AT&T was the big winner last year. Although none of the carriers will be able to fully take advantage of their C-band licenses for two years, AT&T and T-Mobile will still be able to immediately deploy the 3.45 GHz spectrum they won last year.
The verdict
AT&T looks like the clear winner here. Despite its WarnerMedia divestiture creating a distraction and investors being disheartened about the pending cut to the dividend that has made the telecom stock such an attractive investment over the years, it still has momentum in its favor.
AT&T has achieved virtual parity with Verizon in technological offerings and will get a head start in critical 5G-network upgrades. It also offers an attractive valuation, compared to its rival. With a dividend that will still be rich but more sustainable even after it's cut, along with the prospect for future growth, AT&T is the better buy of the two.
