Two Ways to Call on Telecom

05/01/2020 5:00 am EST


Jason Clark

Contributing Editor, The Prudent Speculator

The Prudent Speculator focuses on a well-diversified portfolio of high quality, value-oriented stocks for investors with a 3 to 5 year investment horizon. Here, contributing editor Jason Clark looks at two leading telecom firms.

Telecommunications and wireless phone service provider Verizon Communications (VZ) earned $1.26 per share in fiscal Q1 2020 (vs. $1.22 est.). VZ had sales of $31.6 billion (vs. $32.4 billion est.).

Shares rose following the announcement, as shareholders shrugged at the company’s subscriber numbers, including Verizon’s internet service 59,000 net new additions and 300,000 net postpaid phone service losses. VZ said the negative impact of COVID-19 was $0.04 in the quarter.

Verizon continues to face a tough competitive landscape, with significant churn related to the coronavirus-related shutdowns. But we think that the 5G roll out will continue, as it definitely counts as critical infrastructure, and VZ has done a good job moving towards a sustainable, long-term business model.

VZ trades with a forward P/E below 12 and a yield of 4.3%, metrics that are very attractive relative to the company’s historical norms. Our Target Price now resides at $68.

Integrated telecom services firm AT&T (T) posted earnings per share of $0.84, versus the $0.84 estimate, in fiscal Q1 2020. T had sales of $42.8 billion (vs. $44.0 billion est.).

Shares fell nearly 5% last week on that announcement as well as news that CEO Randall Stephenson is going to retire. He will be replaced by Chief Operating Officer John Stankey, who has been a leading proponent of the company’s turn toward entertainment.

With the company’s 7.0% dividend yield not in jeopardy at this point and the business not seeing major adverse impacts from the coronavirus outbreak (compared to many other companies), we like the stability AT&T brings to our broadly diversified portfolios.

There are sure to be challenges on the horizon, including customer nonpayment revenue dings, but we like the long-term, better-than-utility-like exposure (and entertainment focus) with a big yield and a very reasonable sub-10 times P/E ratio. Our Target Price is now $42.

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