Recession fears have gripped the market this year. The S&P 500 index is down 16.4% this year due to concerns that nagging inflation could tip the U.S. into a recession. The Federal Reserve has said that keeping the U.S. out of a recession has become secondary to reeling in inflation. With preventing a recession seemingly on the back burner, there has been a growing chorus of recession calls.
If a recession does hit the U.S., folks will likely cut down on discretionary spending on things like traveling or dining out. On the other hand, cutting smartphone service would be last on the list of household budget cuts. Consumers' smartphone addiction adds a recession-resistant element to cellular service providers Verizon (VZ 1.39%) and AT&T (T 1.53%).
Verizon's stock price is down 8.4% this year, and AT&T's is up 1.5%, both outperforming the S&P 500 index year to date. In addition, each pays a dividend yield of more than 5%. Here's why these two stocks could continue to outperform in a recession.
Verizon made a big splash in 2021 when it committed $45.5 billion to license bandwidth that carries 5G signals. Verizon's plans for its 5G airwaves are grand. As the company builds out its 5G network, customers will be able to get broadband home internet along with their smartphone service.
The network will also extend to businesses that can use the lighting-fast 5G internet connection to run their cloud computing platforms. Verizon is the only service provider to partner with all three major cloud platforms. The company is currently in the process of deploying its 5G service across the U.S. As it does, Verizon could further cement itself as a leader in national service coverage.
With all the growth initiatives the company has planned, profits from its bread-and-butter smartphone business allow it to maintain a steady dividend. The company has increased its dividend for 15 straight years. If it continues to grow as it expects, Verizon could also grow its dividend. The stock currently has a dividend yield of 5.4%.
The 5G revolution is also part of AT&T's plans. In the 2021 5G bandwidth auction, AT&T spent $23.4 billion. Like Verizon, AT&T plans to expand its cellular service to 5G coverage for individuals and businesses. The company already does business with about 90% of Fortune 1000 companies. These existing relationships could give them an advantage as current business customers switch to 5G.
Recently, AT&T sold its Warner Bros. subsidiary to Discovery for $40.4 billion, and shares of the newly created Warner Bros. Discovery. With the loss of profits from the Warner Bros. business, AT&T cut its annual dividend from $2.08 a share to $1.11. Regarding the dividend cut, CEO John Stankey said the money would provide a better return by investing in the business. Even after accounting for the dividend reduction, AT&T shares still yield 8.5%.
The fundamentals support the dividends
It's a good sign for dividend-paying companies when their net income covers their dividend payments. That means the company generates enough profit to pay its dividend. This box is checked for both these companies.
For instance, in 2021, Verizon generated a net income of $22.6 billion, which was plenty to pay $10.4 billion in dividend payments for the year. In 2022, the company plans to spend significantly more money on its 5G build-out and still predicts earnings per share to be between $5.40 and $5.55. In May this year, Verizon announced a $0.64 quarterly dividend, which equates to $2.56 annually -- easily covered by earnings.
AT&T's dividend appears just as safe, even though it will also be spending more on its 5G ambitions. The company forecasts 2022 adjusted earnings per share between $2.42 and $2.46, which handily covers its previously announced $1.11 annual dividend.
The two companies generate reliable profits that comfortably pay their dividends. Though customers cutting their cellular coverage or internet connection during a recession isn't likely, both companies could sustain their dividend if net income were to stumble. If you're an income investor worried about a recession, these two stocks should be on your radar.