24/7 Wall St.

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.

Verizon

Merrill Lynch reiterated its Buy rating and $55 price objective late in the week of May 20. This was after a conversation with Verizon’s 5G team. The Merrill Lynch call shows Verizon at the forefront of the 5G conversation, and the firm sees it being a bundle of technologies that will not just focus on wireless. Still, Merrill Lynch thinks it could be 2019 before this gets into full swing. Its investment rationale states:

Verizon has the most defensible wireless subscriber base in the industry with superior profitability. The company emerged from the recent spectrum auction with a stronger balance sheet post-asset divestitures. We expect Verizon’s earnings growth to outpace peers.

On April 22, Argus reiterated its own Buy rating, but it has a much higher analyst target of $60. Argus noted:

Although Verizon shares are facing pressure from the Wireline strike and the potential bid for Yahoo!, we believe that Verizon’s long-term strategy remains intact in the face of intensifying wireless competition. … In our view, CFO Fran Shammo’s commitment to debt reduction suggests that Verizon will remain disciplined in any bidding process for Yahoo! At the same time, a prolonged strike could lead
management to lower its full-year earnings guidance. … Verizon appears favorably valued at current levels, with a projected 2016 P/E of 12.4, below the peer average of 15.4.

Argus maintained its adjusted 2016 earnings estimate of $4.00 per share, but cut its 2017 forecast to $4.12 from $4.16 per share.

A lesser upside call on Verizon was made by Jefferies on April 26. It maintained a Hold rating, but it still sees a $53 target price. The firm attended a sell-side event hosted by senior Verizon leadership, which also focused on 5G wireless, small-cell densification and the evolution of the video landscape. Jefferies noted:

Management feels good about moving forward even in the absence of industry standards, including deployments much sooner than the 2020 timeframe referenced by industry participants, but did acknowledge that mobile 5G would require standards development.

Management appeared confident in its ability to continue to remove costs from the business across both wireless and wireline, and noted ongoing labor negotiations as adding a level of uncertainty to the earnings guide. Management believes Verizon has more to gain than lose from the current FCC review of the special access market and noted the potential for cost reductions out of footprint.

Warren Buffett

Buffett’s most recent holdings release showed that the team no longer had any AT&T shares. The reason for this sale was that the team originally had bought into DirecTV and rode that up and up into the acquisition in 2015. Berkshire Hathaway initially held some 59.3 million DirecTV shares. It is very customary for Buffett’s team to jettison a position after gains are made from a merger, even if it may take them some time to exit.

Buffett’s team still holds Verizon Communications. It was shown on May 16 to be 15 million shares, the same stake as in recent quarters. Still, this stake was raised from a lower level a year earlier. That is a $750 million stake, which is big for the rest of us but it might be too small to move the needle for Buffett.