Does AT&T or Verizon Have the Better Dividend?

May 4, 2014 by Douglas A. McIntyre

Verizon wireless logoOn the face of it, AT&T  Inc.’s (NYSE: T) has a better dividend than Verizon Communications Inc. (NYSE: VZ). AT&T’s payout is 5.2% at $1.84. Verizon’s is 4.5% at $2.12. Each of the companies has enough cash to keep its dividend as is, or increase it. So, dividends might not ultimately be the issue — stock price may. However, dividends are never a sure thing.

For the last year, Wall St. has voted that Verizon is the stronger stock, although the opinion has been tepid. Verizon’s shares are down 4% over that period, to AT&T’s drop of 10%. So, something has to be wrong.

The first thing which is wrong with both companies, that could eventually hurt their abilities to hold dividend payouts at current levels, is that the home telephone is going away. Some surveys show that the number of homes without a landline at all has risen to a third of all U.S. households. Many of these people simply use their cellphones at home. And, the further bad news for AT&T and Verizon is that many people have switched to home phone service provided by cable companies as part of packages which include broadband and television service.

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As a sign of the attrition in wireline business, AT&T’s operating income from this segment fell 10.5% to $1.5 billion in the first quarter of 2014 from the same quarter in 2013. If AT&T’s U-verse broadband product were not part of this segment, AT&T’s profit in its landline business would have fallen more.

The other, unexpected problem for AT&T and Verizon is the price war in the cellular subscriber business. Each of the companies expected that, over time, their subscribers would pay more and more for data and multimedia plans. These plans have been wrecked by a price war started by T-Mobile (NYSE: TMUS) and Sprint (NYSE: S). Each needs needs to dig its way out of positions which are well behind AT&T and Verizon in total subscriber count. Sprint can finally afford a price war because its largest shareholder, Softbank, has made the decision to  put market share over earnings. AT&T’s wireless revenue rose only 7% to $17.9 billion in the first quarter. Wireless is no longer the explosively growing segment that it used to be.

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AT&T and Verizon planned for their wireless businesses to grow as their landline businesses disappeared. Those plans are no longer viable

Although neither company is anywhere close to financial trouble, it is telling that, at the end of the first quarter, AT&T had cash on its balance sheet of $3.6 billion and debt maturing within one year of $8.3 billon. That’s not a ratio investors warm to. Perhaps the answer to the question of which of the two large telecom company has the better dividend is that neither does

 

 

 

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