The telecom sector would seem to offer a respite from the storm of this year's volatile stock market, as the companies operating there have a history of reliable earnings and consistent dividend payments. But two of the industry's biggest telecommunications players, Verizon (VZ 1.17%) and AT&T (T 1.02%), prove that even the public's reliance on mobile devices doesn't shield a company from macroeconomic factors such as inflation.
Both companies gave investors a rough time this year, albeit for different reasons. Both have seen stock prices drop in recent weeks, with Verizon's stock price hitting a 52-week low on Sept. 8, and AT&T's stock price hovering close to last December's low.
So is now a good time to scoop up shares in either of these beaten-down stocks? If so, is one a better buy?
Verizon's customer acquisition quandary
Verizon's stock price dropped due to a disappointing second-quarter earnings report, with revenue of $33.8 billion, which was essentially flat year over year. But that's not the worst news.
Postpaid customers are the telecom industry's most valuable, and in this area, Verizon's second-quarter postpaid phone net additions totaled just 12,000. Compare this to 275,000 last year in Q2, and 173,000 in 2020's Q2 despite the onset of the pandemic.
Weak customer-acquisition numbers forced Verizon to cut its 2022 revenue outlook. The company's wireless service revenue, which accounted for $18.4 billion of the $33.8 billion in total second-quarter revenue, was forecast to grow in the range of 9% to 10% year over year, but the company now estimates between an 8.5% and 9.5% increase.
A confluence of factors drove customers away. Verizon's costs increased, so the company began raising prices in the second quarter. At the same time, pandemic-related stimulus funding ended, and customers fled for better deals from the competition.
But it's not all bad news. Verizon's consumer business grew revenue by 10% in the first half of 2022, thanks to the company's acquisition of TracFone and customers who upgraded to 5G-compatible devices. Growth in Verizon's consumer division is crucial since it drove $50.9 billion of the $67.3 billion in revenue generated in the first half of this year.
AT&T's mixed results
While Verizon struggled with customer acquisition, AT&T experienced the opposite. Its second-quarter postpaid phone net additions of 813,000 were the highest for a second quarter in over a decade.
AT&T's strong acquisition numbers, along with customers upgrading to 5G-enabled devices, fueled year-over-year second-quarter mobile revenue growth of 5.2% to $19.9 billion. This success helped drive overall second-quarter revenue to $29.6 billion, a 2.2% year-over-year increase when accounting for divested businesses.
But AT&T said costs were up about $1 billion more than expected. Meanwhile, some customers began to struggle with paying their bills on time, resulting in $1 billion in delayed payments. These unexpected factors contributed to AT&T cutting $2 billion from its 2022 forecast for free cash flow (FCF), an essential element in paying its dividend.
Declining FCF was unwelcome news, especially following the company's massive dividend cut of nearly 50% earlier this year, causing the stock price to drop. AT&T's status as an attractive dividend stock is understandably questionable now.
The better beaten-down telecom stock
Despite the disheartening second-quarter results, Verizon and AT&T each benefit from transitioning customers to 5G networks. Both experienced strong equipment sales as customers move to 5G-enabled devices, a sign that this transition is unfolding successfully. Over the long run, the shift to 5G will serve as a tailwind for both.
So between the two, which is the better investment? Although AT&T's customer acquisition numbers far outstrip Verizon's, the latter generated more revenue. In the first half of 2022, Verizon's $67.3 billion in revenue eclipsed AT&T's $59.4 billion.
And while both have a dividend yield around 6%, Verizon offers the more-stable payout. On Sept. 6, it raised its dividend for the 16th consecutive year.
But the U.S. telecom market is saturated, meaning companies must take customers from competitors to grow. AT&T is succeeding here at Verizon's expense.
Also, while Verizon cut its 2022 forecast for wireless service revenue, AT&T increased its wireless service revenue estimate from 3% to between 4.5% and 5% growth. Given these factors, AT&T looks like the better telecom stock right now. That said, is it a good time to buy shares?
With both companies raising prices in the second quarter, and inflation continuing to affect the economy, customer acquisition trends could shift next quarter. Investors might want to wait for third-quarter results to assess the trends before buying shares.
