AT&T and Verizon face strong competition in their wireless and Internet businesses, and both have used acquisitions to enhance their services and attract new subscribers. Expanding this way adds risk, but we feel those new businesses will spur long-term earnings for each company and provide more cash for dividends.
AT&T INC. $38 (New York symbol T; Income Portfolio, Utilities sector; Shares outstanding: 6.1 billion; Market cap: $238.1 billion; Priceto-sales ratio: 1.4; Dividend yield: 5.2%; TSINetwork Rating: Average; www.att.com) is the largest wireless carrier in the U.S. It also offers tra ditional phone and satellite TV services.
The company’s revenue rose 28.5%, from $127.4 billion in 2012 to $163.8 billion in 2016. In addition to strong demand for wireless and high-speed Internet services, AT&T fuels its growth with acquisitions. They include its July 2015 purchase of DirecTV for $48.5 billion (70% stock and 30% cash). That business now has 25.1 million satellite TV customers in the U.S., and 13.7 million customers in Latin America.
AT&T’s overall earnings declined 4.7%, from $13.7 billion in 2012 to $13.1 billion in 2014. But due to fewer shares outstanding, per-share earnings rose 7.3%, from $2.33 to $2.50. After the DirecTV acquisition, earnings improved to $2.69 a share (or a total of $15.2 billion) in 2015. Earnings then reached $2.84 a share (or $17.6 billion) in 2016.
In the three months ended March 31, 2017, AT&T’s overall revenue fell 2.9%, to $39.7 billion from $40.5 billion a year earlier. It added 2.1 million new wireless subscribers (net of cancellations), and ended the quarter with 134.2 million users. However, many of those new customers are bringing their own phones instead of buying them from AT&T. That was the main reason for the revenue decline.
Earnings in the quarter fell 8.8%, to $3.5 billion from $3.8 billion. Earnings per share dropped 9.7%, to $0.56 from $0.62, on more shares outstanding. If you exclude merger and other unusual costs, earnings per share gained 2.8%, to $0.74 from $0.72.
Exclusive content key reason behind big takeover AT&T now hopes to spur its long-term growth with a deal to buy media company Time Warner Inc. (New York symbol TWX) for $85.4 billion, 50% in cash and 50% in shares. If you include Time Warner’s debt, the total value of the takeover is $108.7 billion. Following the purchase, Time Warner investors will own 15% of the combined company. AT&T expects to complete the deal by the end of 2017.
Time Warner owns several popular cable TV channels, including CNN, HBO, TNT, TBS and Cartoon Network. Its Warner Bros. studio also produces TV shows and movies. AT&T plans to use this exclusive content to attract more customers who want to stream video on their smartphones and other mobile devices.
The acquisition will increase AT&T’s long-term debt by roughly $40 billion. It was $120.6 billion as of March 31, 2017, or a high 51% of the company’s market cap. However, eliminating overlapping operations and other benefits should save AT&T $1 billion annually.
Excluding Time Warner, the company will probably earn $2.95 a share in 2017. The stock trades at a reasonable 12.9 times that estimate. The purchase will also give AT&T more cash flow for dividend increases. The current annual rate of $1.96 a share yields 5.2%.
AT&T is a buy.
VERIZON COMMUNICATIONS INC. $45 (New York symbol VZ; Income Portfolio, Utilities sector, Shares o/s: 4.1 billion; Market cap: $184.5 billion; P/s ratio: 1.5; Divd. yield: 5.2%; TSINetwork Rating: Average; www.verizon. com) has 113.9 million wireless users, 13.6 million phone customers and 15.6 million Internet and TV subscribers.
In 2014, the company bought the 45% of the Verizon Wireless joint venture it didn’t already own from U.K.based Vodafone Group (Nasdaq symbol VOD). Verizon Wireless sells wireless services in the U.S. Verizon paid $130 billion for Vodafone’s stake.
Thanks to that purchase, the company’s revenue rose 14.0%, from $115.8 billion in 2012 to $131.6 billion in 2015. In 2016, Verizon sold some of its local telephone operations. As a result, revenue for that year fell to $126.0 billion.
Earnings jumped from $2.32 a share (or a total of $6.0 billion) in 2012 to $4.00 a share (or $11.5 billion) in 2013. Profit then fell to $3.35 a share (or $13.3 billion) in 2014, but rebounded to $3.99 a share (or $16.3 billion) in 2015. Earnings fell to $3.87 a share (or $13.6 billion) in 2016.
In the quarter ended March 31, 2017, Verizon earned $3.45 billion, or $0.84 a share. That’s down 20.8% from $4.3 billion, or $1.06, a year earlier. Disregarding unusual items, the company earned $0.95 a share in the latest quarter. Revenue fell 4.5%, to $29.5 billion from $30.9 billion.
Buying one of the Internet’s best-known brands Verizon has now completed its $4.5 billion purchase of Yahoo! Inc.’s Internet search business and related websites. These operations attract 1 billion active users every month.
The company plans to merge the Yahoo operations with the AOL websites it acquired in 2015 (including The Huffington Post, TechCrunch and Engadget). That combined business will be called Oath, and Verizon expects it to generate $4.7 billion in online ad revenue for 2017.
The company will also buy Straight Path Communications (New York symbol STRP) for $3.1 billion. That firm owns licenses for wireless frequencies. They will help the company launch new 5G wireless services, which are up to 10 times faster than Verizon’s current 4G networks.
Altogether, those acquisitions will add to Verizon’s longterm debt, which totalled $116.5 billion as of March 31, 2017 (or 63% of its market cap). However, they should give the company an advantage over other wireless carriers.
Verizon will likely earn $3.86 a share in 2017, and the stock trades at a moderate 11.7 times that forecast. The $2.32 dividend yields a high 5.2%.
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