AT&T and Verizon: Transforming Telecom

06/19/2017 2:54 am EST


Elizabeth Blessing

Contributing Editor, Leeb Group

In 2017’s first quarter, AT&T (T) and Verizon (VZ) both shocked Wall Street by reporting, for the first time ever, a net loss in wireless subscribers, notes Elizabeth Blessing, editor of The Complete Investor.

AT&T shed around 191,000 subscribers vs. analysts’ predictions it would gain 100,000. Verizon lost 307,000 wireless subscribers compared to an expected gain of 225,000.

Subscribers had been jumping ship to competitors Sprint (S) and T-Mobile (TMUS), enticed by unlimited calling, data, and texting plans. While both AT&T and Verizon responded mid-quarter with their own unlimited plans, it was too late to stem the tide before the release of first-quarter results.

The shares sold off and year to date are down 10.6 percent for AT&T and 15.0 percent for Verizon. But we think investors overreacted, and we view the current weakness as an excellent buying opportunity.

That’s because the telecommunications industry is moving away from being merely a provider of mobile and wired phone services and towards becoming more like media conglomerates that offer bundled services of unlimited phone, fast data streaming, and customer-attracting content.

With their high free cash flow, both AT&T and Verizon have the wherewithal to be in the forefront of this transition by investing in the newest technology and making strategic acquisitions.

So while for now smaller rivals may siphon off price-conscious customers, over the longer term AT&T and Verizon are better placed to meet consumers’ demand for the next generation of high-speed data and original content.

In early May the two telecom giants engaged in a bidding war to acquire Straight Path Communications (STRP). At stake was Straight Path’s control of the wireless airwaves needed to power 5G, the next generation of high-speed wireless service.

Verizon outbid ATT's offer and VZ agreed to pay AT&T $38 million as a termination fee. Straight Path gives Verizon a big edge in developing a 5G wireless network capable of carrying far more data at lightning speeds.

As Verizon gains the lead in developing a 5G platform, AT&T has looked for an edge in content development with its proposed $85.4 billion merger with media and entertainment giant Time Warner (TWX). The acquisition would give AT&T access to a bevy of profitable Time Warner media brands including CNN, HBO, TBS, TNT, and Warner Bros.

We continue to recommend both AT&T and Verizon as excellent companies offering plenty of growth opportunity as they lead in the changes transforming the telecom industry. Both also have a history of dividend growth, with yields for each currently at around 5 percent.

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