Income investors typically flock to telecommunications stocks because many offer very high dividend yields that trounce the yield for the broader market. Three in particular that get a lot of attention are AT&T (NYSE:T), Verizon Communications Inc (NYSE:VZ), and Frontier Communications Corp (NASDAQ:FTR).
Frontier might lure investors looking for income because it currently yields 8.5%. This is higher than even its industry peers, AT&T and Verizon, which yield 5.2% and 4.6%, respectively. But it's important for Fools to remember that yield shouldn't be the only consideration when analyzing a company as an investment opportunity.
Total returns are important as well, and from that perspective, Frontier badly lags behind. In fact, during the past five years, shares of Frontier have lost 30% of their value, while AT&T is up 47% and Verizon has gained 78%.
I expect AT&T and Verizon to continue to outperform Frontier for the foreseeable future. That's why investors should consider buying AT&T or Verizon, while staying away from Frontier, despite its higher dividend.
Heading in different directions
A key part of Frontier's strategy is to buy regional wireline assets on the cheap, then generate significant synergies to keep profit growing. This was the motivation behind Frontier's slew of asset acquisitions in recent years, including its $2 billion acquisition of telecom assets in Connecticut from AT&T in 2013, as well as the massive, more recent $10.5 billion deal for Verizon's wireline operations in California, Florida, and Texas.
However, ultimately I see AT&T and Verizon as the winners in their respective deals with Frontier. Relying on cost-cutting measures can only get a company so far.
For example, as soon as the transaction with AT&T closed, Frontier realized $150 million in annualized cost savings. But from a long-term perspective, Frontier's focus on wireline businesses doesn't bode well for the company, because those areas simply aren't where the growth will be in the future.
In stark contrast to Frontier's acquisitions, AT&T and Verizon are each making big moves that will fuel future growth. AT&T is in the process of buying DIRECTV in a massive $67 billion transaction, including debt. This is a huge deal for AT&T, because it will allow the company to gain instant and significant access to new markets, such as Latin America. DIRECTV's PanAmericana business grew revenue by 19% and added 178,000 new customers last quarter, taking its total to more than 7 million subscribers.
Meanwhile, Verizon recently closed on its own deal to purchase AOL, Inc. for $4.5 billion. This acquisition should provide significant growth, as it opens up a whole new opportunity in mobile video and advertisements. AOL's technological advantage in selling ads and delivering high-quality video is a wise strategic advancement for Verizon.
Going forward, Verizon has announced its intention to launch a video service focused on mobile devices that will show sports, concerts, and other types of entertainment. This makes perfect sense for Verizon, because people are spending an increasing amount of time consuming content and performing everyday functions on their mobile devices.
Fundamentals tell the story
Poor core operating performance was the reason for Frontier's big whiff on its first-quarter earnings. The company reported quarterly profit of $0.02 per share, which was half what analysts were expecting, according to Thomson Reuters.
Frontier continues to shed customers in both the enterprise and residential markets. Last quarter, residential customers declined 0.4%, to 3.1 million, while business subscribers declined 1% year over year, to 301,100.
In comparison, AT&T grew revenue by 1% last quarter, after adjusting for its Connecticut transaction. The company added 441,000 postpaid wireless customers during the quarter, and realized its best-ever first quarter customer churn rate of just 1.02%.
For its part, Verizon grew earnings per share by 21% last quarter, thanks to excellent results in its wireless business. Verizon Wireless posted 6.9% revenue growth year over year, and added 565,000 net retail postpaid connections in the quarter.
The key takeaway for investors is to look beyond just dividend yield when sizing up these three telecom majors. AT&T and Verizon are going in a different direction than Frontier, thanks to the former two companies' focus on wireless growth and opportunistic acquisitions. Meanwhile, Frontier looks more like the buggy-whip operator in the industry, due to its continued focus on wireline.