Life would be simple for AT&T (T 1.10%) investors if Verizon (VZ 0.90%) didn't exist. For years, the two companies have gone head-to-head over landline and wireless customers. Now that Verizon wholly owns Verizon Wireless, the competition is sure to be even fiercer. But, the good news for AT&T is the company is improving. The bad news, however, is Verizon may still be the better option.
The wireless race
In the battle for wireless supremacy, AT&T always seems to be playing second fiddle to Verizon. In the current quarter, AT&T managed to match Verizon in a few ways, but Big Red still holds the lead.
For instance, though AT&T and Verizon both witnessed 7% annual revenue growth in the past quarter, Verizon has over 97 million postpaid connections, whereas AT&T has about 73 million. All things being equal, most investors would probably want to own the company with the larger base that's growing just as fast as the company with a smaller base.
Additionally, both AT&T and Verizon saw postpaid churn come in at just over 1%. However, with 24 million more connections, this number means more for Verizon. Unfortunately for AT&T investors, that is where the similarities end.
Regarding increased spending from existing postpaid subscribers, AT&T said its average revenue per user, or ARPU, increased just 0.4%, whereas Verizon's average revenue per account, or ARPA, increased by more than 6%. In addition, when it comes to wireless operating margin, Verizon's 35% is superior to AT&T at 28%.
As you can see, AT&T is making strides, and its wireless business is doing well, but Verizon appears to be doing somewhat better.
The state of the wired business
Considering AT&T's wireline business compared to peers Verizon and Frontier Communications (FTR), AT&T is doing well, but others are doing better. It would seem that AT&T and Verizon's 0.4% annual decline in revenue is much better than Frontier's 4% drop. However, looking beyond the headline numbers, AT&T isn't as effectively attracting customers to some of its businesses, unlike its peers.
|
Company |
High-Speed Internet Net Additions |
Video Net Additions |
Voice Line Net Losses |
|---|---|---|---|
|
AT&T |
(0.1%) |
18.7% |
(11.1%) |
|
Frontier |
6.8% |
7% |
(8.1%) |
|
Verizon |
10% |
9% |
(7%) |
Source: SEC Filings – all numbers presented as annual growth or decline
AT&T only led peers in percentage of video net additions on a year-over-year basis. In the other categories, AT&T either lagged its peers in its net additions (Internet), or led its peers in losses (voice). The point is, AT&T's landline business isn't the strongest of the pack, and -- again -- Verizon looks a bit better.
The all-important number
Of course, some investors might not care if AT&T is the cream of the crop, as long as the dividends keep rolling in. However, this is another situation where AT&T's performance leaves something to be desired.
Looking at AT&T's core free cash flow over the last three months, the company generated about $2.6 billion. However, during this same time frame, AT&T paid about $2.4 billion in dividends. With a core free cash flow payout ratio of over 90%, AT&T's dividend looks less than safe.
By comparison, Frontier's yield is more than a percentage point higher than AT&T's, yet the company's core payout ratio sits at just 54%. For investors looking for more safety, Verizon's payout ratio of 25% is the lowest of this group.
The bottom line is, AT&T is doing OK, and in some respects has improved its operations. The big problem is, Verizon is doing better by several measures. Long-term income investors should favor the stronger-performing Verizon over AT&T's slightly higher dividend at this time.
