Telecom companies are generally quite generous with their shareholders. Let’s look into three major U.S. telecom companies to find out which rises above the rest. As you can see, the majority of the US mobile phone market is controlled by Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), and Sprint Nextel Corporation (NYSE:S).
There are various ways to evaluate a company’s price. The most common format of a stock’s value is the price to earnings ratio. However, this is an “accounting figure” that can be skewed by various internal factors. For this analysis, let’s instead use price to cash flow.
Verizon – 5.1 times cash flow
AT&T – 7.4
Sprint – 9.4
Winner: Verizon Communications Inc. (NYSE:VZ) is the cheapest based on cash flow to share price. With Verizon, you’re getting the most cash for every dollar you invest. Cash flow is a company’s “blood”. It drives growth and shareholder returns.
Dividends are what I like to call “easy money”. But dividends are more than the occasional gift to your bank account. They also stand for the ability of a company to generate enough profit to pass off portions to shareholders while still operating and growing its business.
A company that has been able to consistently pay and raise dividends validates its business model. Let’s examine the dividend history, dividend growth rate, and dividend payout of each company.
AT&T Inc. (NYSE:T) is known as a dividend stalwart. Based on current prices, its dividend is around 5%. It has also raised its dividend for 29 straight years. Dividend growth has slowed from a 10 year rate of 5.2% to a 3 year rate of 2.4%. AT&T is currently paying out 50.7% of its free cash flow as dividends.
Verizon Communications Inc. (NYSE:VZ) has increased its dividend 8 years in a row. Based on current prices, it yields around 4%. Its dividend growth rate has remained relatively flat for the last decade at about 2.7% annually. Verizon pays out slightly less than half of its free cash flow, somewhere near 45%
Sprint Nextel Corporation (NYSE:S) does not currently pay a dividend. The last dividend Sprint paid was in December of 2007.
A higher yield and longer history of dividend increases gives AT&T Inc. (NYSE:T) the edge over Verizon. At some point in the future, Sprint may yet again pay a dividend.
Verizon Communications Inc. (NYSE:VZ) recently announced the completion of its 4G LTE network. This gives it the most comprehensive 4G network in the U.S. Verizon’s wireless segment is driving growth with a 6.8% year-over-year revenue increase.
Verizon is also gaining market share with its Fios business. Verizon has been rumored to be considering an expansion into the Canadian market as well as a deal for the interest Vodafone Group Plc (ADR) (NASDAQ:VOD) owns in its wireless business.
Looking at its most recent quarter, Verizon Communications Inc. (NYSE:VZ) grew its earnings per share from $0.59 to $0.68. It grew its cash flow from $5.95 billion to $7.53 billion. While debt increased, this was due to the construction of its LTE network which is now finished. Look for cash flow to increase as Verizon’s Fios and LTE ambitions start to generate significant returns.
Similar to Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T) has seen a drastic decline in land line revenue due to a macro-economic shift to wireless communication. Organic growth has been a problem for AT&T of late, and it has been rumored to acquire European telecom companies to spark sales. AT&T Inc. (NYSE:T) recently added the Samsung Galaxy Note 8 to boost its top line.