Why the Verizon and AT&T Bull-Bear Case Looks Questionable in 2017 Versus 2016

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After a strong market performance in 2016, many investors have been flipping and flopping over whether they should own growth stocks or income stocks. It may be that they should be looking for both due to corporate tax rates and to how investors might be taxed less on dividends and capital gains in 2017 and beyond. This puts telecom giants like Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) front and center. Both companies had a stronger than market return in 2016, and Verizon even exceeded what was projected by analysts a year ago. But 2017 looks like it could be far less certain for both Verizon and AT&T investors.

The Dow Jones Industrial Average closed out 2016 at 19,762.60 on December 30, rising 13.4% from the 17,425.03 close on the last trading day of 2015. While 24/7 Wall St. has made the case for Dow 22,000 late in 2017 or early 2018, the reality is neither Verizon nor AT&T will make much contribution. Out of the 30 Dow stocks, Verizon’s weighting is just 1.88%, and AT&T was booted out of the Dow for Apple.

24/7 Wall St. wanted to look at the bullish and bearish case for 2017 in all Dow stocks. Unfortunately, you cannot evaluate AT&T or Verizon independently without thinking about the other company. Maybe Sprint or T-Mobile should be considered too, but the companies are far more narrow and are generally considered less systemically important than AT&T and Verizon.

A common issue for communications and content companies alike is that net neutrality issues may persist, for better or worse, in 2017 and beyond under a new regime and regulatory climate. In October of 2016, S&P tried to differentiate how AT&T and Verizon are starting to look rather different. Will the Federal Communications Commission (FCC) and U.S. Department of Justice be more favorable to cellular carrier mergers ahead? Also, both AT&T and Verizon continue to make changes with other telecom and data center operations outfits, which makes many of the long-lived fixed assets in a state of flux.

Verizon

Verizon ended up generating a 20% return for shareholders in 2016 after ending the year at $53.38 a share. It is hard to know if 2016’s gains ate up the would-be gains in 2017, but analysts now have a consensus analyst price target of $52.55. That would imply a simple downside risk of −1.50% for 2017, but the 4.3% dividend yield would help Verizon shareholders generate a total return of 2.8% this year, if analysts are correct.

The return here might have seemed less good when many investors were worried about chasing growth over income. This is a defensive stock in the classical sense now, and it is the top-yield of the 2017 Dogs of the Dow. December’s gain was 7%, so much of that is a recovery rally based on hopes for better tax treatment on dividends under the Trump administration.

Verizon should win from Trump’s tax plans for corporations and potentially for lower taxes on dividends. While Verizon already acquired AOL, it was still pending a Yahoo merger in 2017. Due to hack reports, it was unknown if Verizon was going to try to lower its offering price or walk away from its Yahoo acquisition ambitions.

With 109.5 million retail connections nationwide, Verizon also provides converged communications, information and entertainment services over what is touted as the country’s most advanced fiber-optic network.