When thinking of basic-needs goods and services, we often think of food, water, and electricity. However, it may be time to include cell phones in that discussion.
According to a survey conducted by Pew Research and published in 2014, 90% of adults at the time owned a cell phone, including 64% who owned a smartphone. Presumably, this latter figure is even higher now. Of these cell phone owners, two-thirds checked their phone for messages and alerts even though they didn't notice it ringing or vibrating, and 44% admitted to sleeping with their phone next to their bed so they don't miss any calls or text messages.
We love our mobile phones so much that cell phone saturation levels are well above 100% in the United States. Based on metrics provided by Strategy Analytics of the top eight wireless carriers in the United States, there were roughly 390 million subscribers as of the third quarter 2015. By comparison, there were only 322.8 million people in the U.S. at the beginning of the year. That works out to a wireless saturation rate of about 121%, mainly because people (and businesses) may have more than one line.
However, don't think for a moment these high saturation levels mean the industry's growth prospects are stale. In fact, the emergence of faster, more consumer-friendly smartphones that are capable of holding more data are expected to drive data transmission and downloads over the next decade. Wireless data expansion presents a high-margin growth opportunity for wireless carriers like Verizon (NYSE:VZ), AT&T (NYSE:T), T-Mobile (NASDAQ:TMUS), and Sprint (NYSE:S), and it gives investors high hopes for the future of the wireless industry.
The importance of brand loyalty
Figuring out which wireless carrier has the best growth prospects isn't as cut-and-dried as you might think. In order to provide some degree of differentiation, we'll turn our attention to Brand Keys' 21st annual Customer Loyalty Engagement Index.
Brand Keys, a New York-based research company, interviewed more than 42,000 people to get to the heart of how engagement and loyalty affected their decision to stick with certain brands across dozens of categories (one being wireless providers). Customer loyalty can be a particularly attractive differentiating factor for wireless providers since customers who are more loyal tend to be less reliant on sales and one-time events to upgrade their device or data plan. Loyal customers also are more likely to tell friends and family about their positive experiences with a company. As a whole, people are likely to act on the recommendation of someone they know and/or love instead of just a random TV, print, radio, or online ad.
Which wireless brand is tops in brand loyalty? Let's take a closer look.
Not feeling the love
Although T-Mobile and Sprint have been adding to their subscriber bases, a sign that the initiatives both companies have implemented are working, they still remain a distant third and fourth, respectively, behind the two telecom giants AT&T and Verizon.
Why the struggles? Part of it could have to do with T-Mobile's and Sprint's comparably smaller advertising budget compared to Verizon and AT&T. The "bigger is better" strategy doesn't always work, but with substantially more cash flow, AT&T and Verizon can outspend T-Mobile and Sprint where it matters most.
For example, The Wall Street Journal noted in July 2014 that through the first half of 2014, AT&T and Verizon had spent a combined $889 million in television ads. Comparatively, $1.77 billion was spent on television ads for the entire wireless category through the first six months of 2014. The digital impressions created by these ads have allowed the two sector giants to hold their edge.
T-Mobile and Sprint have also disappointed in independent service quality testing (although, let's be honest, the results can vary from one independent tester to the next). The latest RootMetrics survey on network performance in the second half of 2015, which was released in February, had T-Mobile in last place in terms of performance in both the 50 states category and 125-metros category. As its only consolation, Sprint was nearby, trailing AT&T and Verizon by a veritable mile. These studies can certainly influence consumer perception, and it looks as if T-Mobile and Sprint remain doomed to fight over the No. 3 spot in terms of subscribers and wireless brand loyalty.
AT&T vs. Verizon: And the brand loyalty leader is...
Deciphering which of the top two telecom giants is the leader in brand loyalty is really, really tough. In terms of postpaid churn rate, and RootMetrics' second-half performance scores, Verizon looks like it would take the nod. Then again, we know AT&T has mounted a voracious comeback after Verizon once held a dominant lead in cities capable of 4G LTE speeds.
Ultimately, Brand Keys selected AT&T as its seventh consecutive brand loyalty title holder over Verizon.
One reason AT&T retains its dominance in engaging and hanging onto its customer base has to do with its effective advertising. According to iSpot, an advertising analytics company, AT&T's ads in mid-October through mid-November, which focused on its supposedly stronger 4G LTE signal, generated a more powerful digital response than Verizon's ads, albeit not by a huge margin. Although these metrics could certainly change from one month to the next, it was interesting to discover that AT&T had nearly doubled Verizon in terms of commercials run over the aforementioned time period. It would appear AT&T is taking it to Verizon with aggressive advertising, and that the tactic is working.
I don't think you can discount the historical factor, here, either. AT&T was the first carrier to retail the iPhone, and it retained this title for four full years before Verizon entered the scene. If you've ever observed a gadget release from Apple, you're likely aware of how attached at the hip consumers are to their devices. As the most popular smartphone in the U.S., AT&T was given four years to build rapport with consumers -- rapport I believe carries over to this day.
What has this brand loyalty done for AT&T? It's allowed the company to keep raising its dividend; a streak that's continued for 32 consecutive years, placing it among a rare group of dividend payers known as Dividend Aristocrats, which have raised their payouts in at least 25 straight years. The company's current yield of 5% is basically double the average for the S&P 500. The cash flow generated from new customer additions and high-margin data plan upgrades also allows for billions of dollars in network investments each year. With the exception of 2014, when AT&T generated $9.9 billion in free cash flow, it's generated between $13.3 billion and $19.7 billion in annual FCF since 2007.
With such a loyal customer base on its side, AT&T might be company that long-term investors and income seekers should consider for their investment portfolios.
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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