If we've learned anything from the performance of Apple's business and stock over the past 18 months or so, it's that the iconic device provider is no sure thing. And although the tech company pays a fat quarterly dividend of $3.05 per share, investors shouldn't confuse this name for an income stock.
Given the cutthroat competition in the handset and tablet markets, Apple's shares appear overvalued and ripe for a fall. And lest anyone think the company's big dividend provides downside protection, consider that the stock's price range often exceeds this disbursement on a typical trading day.
This summer, my colleague Elliott Gue penned an article, Forget Apple: The Profitable Way to Play the Smartphone Boom, in which he enumerates the competitive challenges facing Apple and suggests alternatives to the iPhone maker.
Market share doesn't always translate into profits, especially in an industry where price-cutting is a favorite tactic. But in this case, Apple's decline coincides with the rise of many smaller players, as well as growing saturation of mature markets like the US where it's been strongest.
International Data Corp estimates annual gains in North American smartphone shipments will average less than 10 percent through 2018, down from an average annual growth rate of 44 percent from 2007 through 2012. Meanwhile, the 10 largest handset makers' share of global markets has fallen from more than 90 percent two years ago to only about 75 percent now.
To be sure, the market is still growing. And every time Apple enters a new country or launches a device improvement, sales and earnings should get a pop. But as the iPhone 5 bust demonstrates, such gains are no longer automatic. And the slower its market grows and the more competitive the handset space becomes, the greater the pressure to sacrifice profit margins for sales volumes.
Apple lives in an industry where the competitive landscape changes rapidly and the widely watched stock price can fluctuate considerably with each earnings release or major announcement -- hallmarks of a stock to trade. Yes, Apple pays a healthy dividend, but it's not a stock for traditional income-seeking investors who prefer to build wealth over the long haul by buying, holding and collecting dividends.
AT&T: Growing Dominance, Safe Yield
As the first major wireless operator to offer the iPhone to its subscribers, AT&T is closely associated with Apple.
However, market sentiment toward the telecommunications giant remains considerably less sanguine, with only 11 of the 40 analysts cover the stock giving it a buy rating and 25 assigning it a hold. Likewise, short interest in AT&T stands at 5.6 average trading days, compared to 1.1 days for Apple.
Two concerns have weighed on AT&T.
First, Verizon Communications' (VZ) US$130 billion acquisition of Vodafone's (VOD) 45 percent stake in Verizon Wireless has fomented speculation that the U.K.-based telecommunications outfit could itself be a takeover target, with AT&T as the potential suitor. In addition to the risk of overpaying, investors worry that AT&T would struggle to deal with Europe's economic weakness and regulatory challenges.
Until AT&T does a mega deal -- or management declares its intent to grow organically by acquiring U.S. spectrum and specialty operators -- this uncertainty will also hang over the stock, regardless of the company's quarterly results.
At the same time, price competition in the US wireless market continues to intensify, with Sprint Corp (S) and T-Mobile US (TMUS) cutting prices aggressively to win customers and boost their market share.
But concerns about the ailing No. 3 and No. 4 U.S. wireless providers slashing the price of their subscription plans appear overblown, especially when you consider the huge discrepancies in network investment between the Big Two -- AT&T and Verizon Communications -- and the rest of the telecom space.
Source: Bloomberg, Company Reports, Conrad's Utility Investor
Over the three years ended June 30, 2013, AT&T invested about $62 billion in its network -- more than 35 percent of the total invested by the 15 largest publicly traded US telecom outfits and four times the amount Sprint and T-Mobile US plowed into their systems.
Network differentiation is critical because of the growing penetration of smartphones and consumption of data-intensive wireless services. Against this backdrop, wireless providers have found themselves in an arms race to invest in high-speed networks and acquire wireless spectrum.
Given the disproportionate capital expenditures between the Big Two and their peers, it's no surprise that these behemoths serve more than 85 percent of the wireless industry's most coveted customers -- those with contracts and data plans.
The effective buyout of Sprint Nextel Corp by SoftBank Corp (SFTBY.PK) provided the company with a badly needed influx of capital, but rumors of a recent merger with T Mobile US underscores the investment gap and challenges facing the industry's No. 3 and No. 4 largest players.
With Sprint spending more cash than it's taken in for several years, the move to cut-rate pricing with no contracts could worsen the situation even if the strategy initially bolsters its subscriber rolls. The same is true of T-Mobile U.S., which Deutsche Telekom (DTEGY.PK) looks more anxious than ever to divest.
In contrast, AT&T grew its market share and generated $7.9 billion in free cash flow during the first half of 2013, widening its lead, strengthening its financial position and paying a solid dividend. Those are sterling credentials for any dividend-paying stock.
Forget the hype about Apple's dividend and tech stocks becoming income plays. As one of the two juggernauts that are increasing its stranglehold in a growing essential-service industry, AT&T is a better bet for investors who prefer to build wealth steadily and safely over time.
That being said, some of my favorite dividend-paying stocks for the next 12 months hail from cyclical sectors that stand to benefit from the strengthening U.S. economy and investors' transitioning out of defensive groups such as consumer staples. If you're interested in learning more, Elliott Gue and I will host a free webinar on Oct. 15, 2013, to discuss our favorite stocks and investment themes for 2014.