Verizon has been a doppelganger to AT&T (NYSE:T) ever since they were created in the wake of the 1984 Bell break-up, VZ coming out of NYNEX and Bell Atlantic, T out of SBC and BellSouth. The two companies have remained very similar, slowly upgrading subscriber lines, and gaining a duopoly in mobile phone service.
But the company now known as AT&T has been by far the better investment. Since taking its present form with the BellSouth-SBC merger in 2005, it's up over 80% compared with just over 60% for Verizon. And if you look at the balance sheets, it's easy to see why. Just short of half of Verizon is subject to debt, thanks to its $130 billion acquisition of the rest of Verizon Wireless in 2014. For AT&T, the debt-to-assets ratio is closer to 30%.
These are stocks you buy for dividends, not for capital gains, although the appetite for that safety has sent both these companies up over 20% in the last year. But even now you're getting a better yield on AT&T, 4.47% against 4.05% for Verizon.
Then there's Yahoo. Yahoo may be one of the dumbest technology investments of all time.
What VZ is buying is the song of Tim Armstrong, whose AOL will become a de facto parent to Yahoo, that he can dominate Internet advertising and content and improve Verizon's public standing as well. But there is an enormous amount of work to do before anything good can possibly happen, and I happen to think the content side of the business is worthless.
This has nothing to do with Marissa Mayer. It has to do with a primary fact of Internet life. Software scales and people don't. Ever since 1997, Yahoo has been chasing content, meaning content creators, meaning people who create content. Content, like this story, is a butterfly - its valuable life may be measured in days. Software, on the other hand, can retain and even enhance its value for years. Or, as I have said since becoming a journalist over 30 years ago, always be wary of any business where the first word is submission.
Verizon is going to find, in a few years, that it bought a story, a line, a dream, and nothing more. It's going to find that it has to write off both AOL and Yahoo, first in dribs and drabs, later in great big hunks.
Even if you ignore Yahoo's content, this is a software business, and Verizon is just not very good at software. Its Terramark cloud unit is barely on the radar while AT&T can now afford to invest heavily in cloud. It was Terramark, even then owned by Verizon, that failed in the roll-out of the Affordable Care Act. The company is short on capital and short on talent.
And when it comes to the future, cloud is the game. Cloud is not just useful as something to sell. It's vital in building a scaled communication business. It requires billions of capital spending each year, money that must come from somewhere, and too much of Verizon's capital is tied-up paying back the loans from Vodafone. Too much management attention is also going to be paid on Yahoo, and that $4.8 billion is not coming back.
Verizon should be more like AT&T, which knows it is in the business of moving bits - wireless bits, consumer bits, satellite bits, and bits in the Internet core. That's a good business to be in. It drives revenue that can sustain cloud investment. You have to write off capital quickly, you're always selling more bits for less money, but it's sustainable if you have capital, as AT&T has.
Verizon, by contrast, has a lagging consumer technology in FiOS, a heavily indebted wireless unit and, now, Yahoo. I wouldn't touch this stock with a barge pole.
But there is a pair trade you can make here if you are looking for a capital gain. Buy AT&T options and sell Verizon options against it. AT&T is almost certain to move faster, and in the right direction, against Verizon from here. You can make some money. Or just buy AT&T common and pocket your dividends.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.