This is our first in a proposed long series of Dividend Stock battles. The purpose of creating such a series was explained in my recent newsletter:
When investors are interested in a specific sector, they might come down to two interesting stock picks in the same category that both look strong. Unfortunately, it doesn’t mean that if you find a pair of great stocks that you necessarily have the money to do it and that it will fit your asset allocation. This is why I have decided to analyze two stocks of the same industry monthly and publish a comparison to know which one I would pick for my portfolio. So let the battles begin.
Round 1: What's Inside the Black Box? Company Structure and Product Offering
While both AT&T (T) and Verizon (VZ) are pretty similar on several levels (type of products, contracts, distribution network, etc.) there are a few things differentiating them. The first one is customer service. In the blue corner, we have AT&T, known for taking its clients for granted and offering a mediocre customer service experience. In the red corner, we have Verizon, known for its A-1 customer service. Therefore, when you have a problem, you will definitely remember your experience for better or worse since the gap between the two companies is pretty clear.
AT&T made a very good move when it became the first distributor of the now-famous iPhone (AAPL). We can guess that T is benefiting from its huge reputation and branding. However, Verizon was able to get its distribution license too. We can tell that for future opportunities, the first company to pick up the “coolest phone” or product will gain a serious edge as its sales will automatically go up.
Round 2: Financial Statements
I must give a big uppercut from AT&T to Verizon when we look at the dividend data. T's dividend yield and dividend growth over five years, and dividend payout ratio, is better than Verizon's. We can say that while AT&T sits on its fat steak when it comes time to serve clients, it's much faster to please investors. I think that AT&T just picked an advantage in the battle with Verizon.
This is where it gets tricky: Verizon shows stronger earnings growth while AT&T is showing a smaller P/E ratio and a better ROE. In terms of sales growth, both companies are pretty similar, but we can bet that Verizon will probably increase faster than AT&T in the years to come. After looking at both financial results, I would give a small advantage to Verizon for its earnings growth potential.
It hurts, they bleed, but the battle is not over yet. We are set for the final round. While both companies will fight each other with equal weapons (iPhone), the next one to get the coolest gadget will probably be able to win this final round.
In the meantime, I would separate the companies for the final count and declare two winners … but for different investors:
- Dividend investors looking for steady income should pick AT&T.
- Dividend investors looking for growth should pick Verizon.
Because of its habit of paying steady high dividends while maintaining a low payout ratio, I would pick AT&T over the long term. On top of that, since Verizon shares have climbed since the beginning of the year, it is very possible that AT&T has better growth potential as of today.
However, Verizon appears to be a company working on a solid basis (innovation and customer service) which should push its sales (and earnings) over time. This is why I think that growth over time will be higher with Verizon. But in order to finance its growth, it might slack on the dividend payout growth.