What: Shares of Verizon Communications (NYSE:VZ), one of the nation's largest wireless and content providers, faced substantial pressure in Thursday's trading session, with its shares falling $0.98, or 2%, to close at $48.10, according to S&P Capital IQ data. This came after JPMorgan Chase downgraded the company in favor of rival AT&T (NYSE:T). It was the biggest one-day move for Verizon since mid-March.
So what: According to the research note released before Thursday's opening bell from Philip Cusick at JPMorgan, there are now a lack of near-term catalysts with Verizon that make its chief rival a much more attractive play.
Cusick believes AT&T's superior dividend yield (5.4%, versus 4.5% for Verizon), its synergies, the growth expected from its buyout of DIRECTV (NASDAQ:DTV), and its ability to improve its cost structure, make it the better play for investors. As a result, JPMorgan upgraded shares of AT&T to "overweight" from "neutral," and upped its price target to $40 from $35. AT&T shares gained 0.7% on the day, while the broader market S&P 500 dipped 0.8%.
As for Verizon, the expectation is that it could takes years for its purchase of AOL (NYSE:AOL) for $4.4 billion, announced last month, to provide substantial revenue and bottom-line benefits. Cusick downgraded Verizon to "neutral" from "overweight."
Now what: The $64,000 question that has to be asked is whether this downgrade makes sense. In other words, should investors really covet AT&T over Verizon?
The answer probably depends on your time frame. Neither stock is a genuinely great growth play; both have been defensive income plays for the better part of two decades now. However, I will agree with Cusick's analysis in this instance: AT&T does offer the best opportunity for near-term growth. Its addition of DIRECTV and 5.4% yield do make it a preferred investment for income investors. Furthermore, its substantial investments in its next-generation 4G LTE network are beginning to close the gap between it and Verizon. When it comes to brand loyalty, AT&T Wireless also maintained the leading spot ahead of Verizon Wireless in the 19th annual Customer Loyalty Engagement study from Brand Keys -- though it should be said that churn rates are exceptionally low for both companies.
I don't believe investors will regret choosing AT&T over Verizon, or vice versa, because the dividends alone provide more than enough reason to hold these free cash flow cows over the long term. But it's important investors recognize that over the coming year or two AT&T may be the telecom giant of the duo that puts together the more appealing growth prospects and fundamental metrics.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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