Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

AT&T Inc. (T) and Verizon Communications Inc. (VZ): The Results Are In

AT&T Inc. (T)AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) just reported 2Q earnings, and these two telecommunication giants are telling similar stories to us all.

Costs are half of the equation

AT&T reported that the expenses associated with higher smartphone selections by its customers drove net income down 2.1% this quarter. However, the higher revenue for each smartphone should offset the increased costs over time.

Rising revenue is good, but cash is king

AT&T Inc. (NYSE:T)’s revenue increased by 1.6%, or $600 million, to $32.1 billion this past quarter from the year-ago period. The wireless business was up 5.7% on smartphone sales, and the wire-line business was up 2.4% on additional U-Verse subscribers.

Verizon Communications Inc. (NYSE:VZ) increased its consolidated revenue by 4.3% and increased EPS by 14.1% year-over-year. The main drivers of this growth were FiOS add-ons and an increased number of wireless devices.

These increases lead to a strong free cash flow position at both telecoms. AT&T generated $9.5 billion in free cash flow from operating activities, and returned more than $5.7 billion to shareholders via repurchases and buybacks. Verizon also generated $9.5 billion in free cash flow, and reduced debt outstanding by $2.6 billion.

Smartphone saturation

This past quarter, AT&T Inc. (NYSE:T) had 88% of postpaid-phone sales registered as smartphones. This is concerning for future revenue growth in the wireless business for both AT&T and Verizon Communications Inc. (NYSE:VZ). These two companies have been relying on the mobile-phone growth engine to fuel their earnings and free cash flow, and market saturation could lead to shrinking margins. As carriers run out of new customers, they will start to compete on price.

This saturation is bad news for companies like Apple Inc. (NASDAQ:AAPL), which are now competing against other manufacturers for the same number of customers. But, it is good for one company – Google Inc (NASDAQ:GOOG) . Google makes its bread and butter by having smartphones connect to the Internet and use its search engine. Google doesn’t care about the manufacturer of the phone, so long as users use its search features.

Verizon and AT&T Inc. (NYSE:T) currently have 10.5% and 9.5% net profit margins, respectively, and both pay out nearly 60% of free cash flow in dividends. Verizon Communications Inc. (NYSE:VZ) has a yield of 4.1% and AT&T has a dividend yield of 5.1%

The key differences between AT&T Inc. (NYSE:T) and Verizon are in their dividend and company structures. AT&T is a wholly owned wire-line and wireless company, whereas Verizon Communications Inc. (NYSE:VZ) owns its wire-line assets, but only half of Verizon wireless. Verizon shares the wireless assets with Vodafone Group Plc (ADR) (NASDAQ:VOD) on a 55%/45% basis.

U-Vers & FiOS

AT&T Inc. (NYSE:T)’s U-Verse and Verizon Communications Inc. (NYSE:VZ)’s FiOS are making up larger and larger parts of their businesses. The U-verse segment at AT&T now makes up one-half of revenue from one-third last year, with over 9.4 million subscribers.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.