Why Verizon and AT&T Are Still Buys for Upside and Big Dividends Ahead

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Investors love dividends, and one area that is ripe with high-yielding payouts is the major telecoms. This used to be considered a highly defensive investing category because no one would drop having a telephone. Then came the waves of competition (competitive local exchange carriers, or CLECs) and the waves of mass market cellphones, and now you have a four-way fight for the dominance in mobile telecom.

The two leaders are AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). AT&T leads the dividend charge at 4.99%, versus 4.55% for Verizon. Both stocks are up handily in 2016, when the broader market cannot find any direction. AT&T is up almost 15% so far in 2015, versus almost a 10% gain for Verizon.

If the analysts on Wall Street are correct, both AT&T and Verizon could still have upside. AT&T closed on Friday at $38.45, and its consensus analyst price target of $39.57 would imply 8% upside, if you include the dividend. Verizon’s most recent close of $49.66, and its consensus price target of $52.30, implies right at 10% upside, if you include its dividend.

Both companies have also been heavy in mergers and acquisitions (M&A). AT&T has been absorbing and consolidating billing and support efforts after the DirecTV acquisition. AT&T also has been buying assets in Latin America. Verizon now owns all of Verizon Wireless after its deal with Vodafone, and Verizon also has bought wireline/data operations, and it now owns AOL and may emerge as one of the most interested parties for Yahoo.

Another driving force here is the endless parade of dividend hikes. Verizon and AT&T would both be considered Dividend Aristocrats, had it not been for the shakeup and breakup of the old AT&T/Ma Bell years ago.


There is even a Warren Buffett angle here, as he has owned both companies recently. His latest holdings now just include Verizon.

24/7 Wall St. reviews dozens of analyst calls each day, and hundreds per week. Many analysts have chimed in between these two companies of late. These are some of the more recent analyst calls on them.

AT&T

AT&T was reiterated as Buy and the price target was raised to $44 from $42 (versus a prior $39.28 close) at D.A. Davidson.

Merrill Lynch recently hosted AT&T’s chairman and CEO, Randall Stephenson, for a series of investor meetings. They discussed combining national video and wireless assets, synergies and expectations for the second half of 2016. After all was said and done, Merrill Lynch reiterated its Buy rating and $42 price objective. The firm said of AT&T:

AT&T is fundamentally sound, with a stable subscription-based business model. Historically, the stock has outperformed during periods of M&A and wireless margin expansion fueled EPS growth and during periods of market uncertainty when AT&T’s dividend yield, solid balance sheet and predictable business model are highly valued. We expect AT&T will generate improved financial performance post acquisition of DirecTV with upside to consensus EPS, greater dividend coverage and upside to synergy targets.

Jefferies reiterated its Buy rating on May 13, with a $44 price target. The firm focused on the video strategy and DirecTV integration, 5G and SDN.

On April 29, Argus reiterated its Buy rating on AT&T and raised its target to $45 from $42. The firm’s view is that the DirecTV acquisition, and that of the Mexican wireless carriers Iusacell and Nextel Mexico, are driving revenue growth. Argus said that AT&T is remaking itself from the old Ma Bell into a 21st century data and content delivery network that is employing wireless, fixed broadband and satellite communications. Argus still admits that competition in the U.S. wireless market remains white-hot and, admittedly Argus did lower its 2016 earnings estimate by a penny to $2.85 per share and lowered the 2017 forecast to $3.01 from $3.04, noting that AT&T’s valuation metrics remain favorable.

Drexel Hamilton also reiterated its Buy rating and $44 price target on May 12.

On May 15, Standard & Poor’s reiterated its Buy rating and $42 price target.