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Anything Blue Can Do Red Can Do Better: Verizon Communications Inc. (VZ), AT&T Inc. (T)

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The $78 Billion Question Affecting Dividend Stocks TodayTo be fair, this didn’t seem to ever look like a fair fight. Verizon Communications Inc. (NYSE:VZ) has been beating AT&T Inc. (NYSE:T) in the wireless game for a while. To be blunt, Verizon has been beating pretty much everyone else as well. The company reported earnings not long ago, and their current quarter proved again why Verizon shouldn’t need to say, “can you hear me now?” to investors.

The Most Important Division Is Killing Everyone Else
Verizon’s growth driver is their Verizon Wireless division, and I don’t know how investors could ask the company to do more than they did in the last three months. Verizon added 2.2 million retail net additions and 2.1 million of these were postpaid subscribers. By comparison, AT&T added 1.1 million new subs, and 780,000 were postpaid subscribers. It took Sprint Nextel Corporation (NYSE:S) nine months last year to add 942,000 subscribers. An even smaller player MetroPCS Communications Inc (NYSE:PCS) has even more trouble, with a net loss of over 93,000 subscribers in the last three months of 2012. The bottom line is, Verizon Wireless is taking subscribers from other companies and flat outgrowing everyone.

Some might suggest that Verizon is gaining these subscribers with promotions, but when they are off contract, they can easily leave. However, the numbers just don’t bear out that conclusion. In fact, Verizon has consistently had one of the lowest churn rates in the industry. In the last quarter, Verizon’s churn rate was just 0.95%. By comparison, AT&T’s rate was 1.19%, Sprint’s churn was 2.08%, and MetroPCS’ churn was 3.6%. While it’s true that MetroPCS’ churn is on prepaid subscribers and not postpaid, this even more enforces the point. When customers sign a contract, they are more likely to stick around.

Maybe the most convincing piece of evidence that Verizon Wireless is the king of the hill is this division’s operating margin. Verizon reported a 24% operating margin last quarter. AT&T’s wireless margin was just 14.5% by comparison. Looking at the smaller players, MetroPCS managed a margin of 23.21%, and Sprint reported a negative margin last quarter. As you can see, no one does it better than Verizon Wireless.

Wireline Wasn’t Bad, But Oh Those Financials
Verizon’s wireline business isn’t the growing enterprise it once was, but the company is offsetting their landline losses with increased broadband and video customers. On an annualized basis, Verizon lost 6.8% of their voice connections last quarter. By comparison, AT&T reported an annualized 13% decline. On a positive note, Verizon added 12.6% more FIOS Internet customers and 13.3% more FIOS Video customers.

What is far more important to most investors is, Verizon’s ability to generate cash flow. This was one measure where AT&T actually outperformed their rival, with free cash flow up 34.7% versus a 13.11% at Verizon. The two smaller players we’ve looked at turned in mixed results. On the one hand, MetroPCS saw free cash flow nearly double in the last four quarters versus the prior year. However, Sprint saw their free cash flow drop from over $560 million in 2011 to just $179 million in the last four quarters. With Verizon generating over $5.6 billion in free cash flow in just one quarter, the smaller players would need years and years to try and match this performance.

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