Michael Hodel: Telecom stocks are among the highest-yielding in the equity market. AT&T and Verizon, the big two U.S. telecom carriers, certainly fit that bill. AT&T's yield today is about 6%; Verizon's is about 4.5%.
Despite the fact that Verizon's yields are a little bit lower, we actually like that company and that stock better today. We think Verizon's focus on the core telecom business will position the firm well for the long term, especially if something unexpected happens in the telecom business. For example, the cable companies are potentially eyeing the wireless business and could get into the space at some point over the next several years. If wireless technology advances to the point that enables the cable companies to come in and disrupt the market, we think Verizon is positioning itself better for that to happen.
Whereas AT&T has chosen to go a different direction. They have diversified the business across media and television. We think that's pushed the firm in some areas where it's going to have more trouble competing over time. In addition, Verizon has a little bit stronger balance sheet than AT&T, which we think again, protects that dividend and gives the firm a little more stability. Whereas AT&T is going to be directing a lot of cash flow towards paying down debt over the next couple of years, Verizon, while also trying to pay down debt, won't have as much of a burden on its future cash flow coming from debt repayment as AT&T does.
So, despite the lower yield, we like Verizon here today. It's trading at about an 8% discount to our US$58 fair value estimate, which is pretty similar to where AT&T is at. AT&T is trading at about a 9% discount to our US$37 fair value estimate. Again, we prefer Verizon to AT&T, and we think it's an attractive play for dividend investors at the current market price.
