Some things have become a standard in this modern technology-forward world – perhaps none more so than mobile phones. With that in mind, adding wireless carrier stocks to your portfolio is not a slam dunk.
Smart investors do their research on exactly why a wireless carrier is worth their investment at the present time or whether a company is showing promise but may not be at a good price at which to open a position.
Pros and Cons of Investing in Wireless Carriers
Mobile phones have a 90% penetration in the United States and that number continues to grow.
In the current market, it seems as though the only people who don’t have wireless phones are very young children and the elderly.
According to Kauffman Fellows, the average person in a developed country has 1.33 connected mobile devices and that number could climb as high as 5 as time goes on.
That’s not to say that each person will have 5 cell phones but rather that they will have five devices that use wireless carrier networks (e.g., phone, tablet, laptop, watch, car). What’s more, that curve is likely to be exponential.
However, there is more to wireless carrier companies than the fact that they carry mobile devices.
The competition is fierce, especially as the bigger mobile carriers have established and sought to grow their networks. In order to win market share, wireless carriers compete on price as well as different promotions (e.g., free phone for new subscribers), service, and coverage. No matter where you live in the United States, you likely have the choice of at least two cell phone carriers, sometimes more.
In a comparison of wireless carriers, these two companies have 34.4% and 33% of the market, respectively. Let’s look at each one in detail to assess their attractiveness as investments.
Is Verizon Stock a Buy?
Verizon [NYSE: VZ] is one of the biggest communications companies in the world.
Formerly known as Bell Atlantic (aka “Ma Bell”), the firm has been around – and thriving – for decades. It operates as two segments: wireless and wireline.
Wireline communications are data and video services, like landlines and fiber optics (i.e. FIOS). Roughly 23% of Verizon’s revenues from these activities.
Originally, the infrastructure for these services were copper lines but they are being steadily phased out and converted to a fiber-based network.
That transition takes time – actual lines need to be placed in the ground – and the capital for these operations can be intense. In many cases it ends up being more cost-effective, especially from a time-value standpoint, to purchase fiber assets from companies (or buy the actual company).
To this end, Verizon [NYSE: VZ] has completed several acquisitions and sales to create the most profitable wireline asset portfolio possible.
Verizon’s Wireless segment (called Verizon Wireless) accounts for 70% of the company’s income. Of this, around 90% of that revenue comes from subscribers while the balance is made up of prepaid service plans.
The company also acts as a distributor for cell phones, tablets, and related products, offering customers a one-stop mobile device service experience.
Verizon [NYSE: VZ] primarily offers service through its 4G LTE network, which is more cost-effective and higher performing than its predecessor 3G. The company also owns a variety of spectrum licenses. It has been re-farming its 3G assets to handle 4G LTE use and ultimately 5G.
For the past several years, the company has been developing 5G assets to handle the additional traffic from so many connected devices. However, it is currently bidding on additional spectrum to support expanded 5G coverage.
These spectrum bids are expensive. The last one Verizon [NYSE: VZ] won came with a price tag of $10.4 billion in cash. However, if the company fails to purchase enough spectrum, it won’t be able to effectively serve the evolving needs of its customers – it’s a catch-22 situation.
Verizon [NYSE: VZ] can make up some of the cost through the cost of its services, but the company is limited there too.
Wireless carriers compete on price. It has to keep its price points competitive or it will lose out to another company. At the same time, if Verizon doesn’t have the same coverage as another carrier, its customers may abandon ship too. It’s a fine line.
Because of that, Verizon’s stock price doesn’t change appreciably. In the last six months, it has traded as low as $53 and as high as $60. Right now, it shows a one-year target estimate of $59.71. To make up for some of this, Verizon [NYSE: VZ] pays a $2.41 (4.14%) dividend yield
Should You Invest in AT&T Stock?
AT&T is similar. The company has a one-year target estimate of $33.80. Over the past six months, the stock has gone as low as $28 and as high as $32.60.
The company pays a $2.04 dividend (6.26%). That extra dividend makes AT&T [NYSE: T] a little more attractive, but let’s look at the company in little more detail before drawing any conclusions.
The first thing you should know about AT&T [NYSE: T] is that it is more than a wireless carrier. The company bought DIRECTV in 2015 and Time Warner in 2018. With its latter acquisition came HBO and Warner Brothers.
AT&T [NYSE: T] operates in five different segments:
(1) Communication (which includes its wireless services as well as internet, video, and voice to business and residential customers),
(2) WarnerMedia (which includes feature films, television shows, HBO, and the Turner networks),
(3) Xandr (which is advertising services),
(4) Latin America (which includes video and wireless service to people in that part of the world), and
(5) Corporate (which is the combination of the businesses that AT&T [NYSE: T] doesn’t market any longer, its support functions, etc).
AT&T [NYSE: T] was the first company to start deploying 5G coverage in 2018 and it expects to expand that to a larger audience in 2020.
The company also has the contract for first responders and emergency personnel and that gives it access to a special nationwide spectrum.
In 2018, AT&T [NYSE: T] also completed the establishment of a 4G LTE network in Mexico. Its advertising segment is growing rapidly, thanks largely to the company’s ability to leverage the data it anonymously collects from its customers.
Verizon vs AT&T Stock: The Bottom Line
Overall, these two companies have many of the same struggles, challenges, and opportunities.
However, while AT&T [NYSE: T] has a smaller share of the wireless market, the company is more diversified and offers a higher dividend with a similar capacity for growth as Verizon.
That said, some investors may feel more confident in a dedicated communications company or may believe that FIOS is the future.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.