AT&T And Verizon: Diverging Paths

| About: Verizon Communications (VZ)

Summary

T and VZ are spending money to grow their businesses.

But they are spending in different ways.

Dividend investors need to understand, and monitor, the differences.

AT&T (NYSE:T) and Verizon (NYSE:VZ) are two of the best known dividend stocks around. And for good reason, the yields are a heady 4.4% and 4%, respectively, both well above the relatively meager 2% or so yield offered up by SPDR S&P 500 ETF Trust (NYSEARCA:SPY). But these two telecom giants appear to be taking different paths toward the future, which is something to which you'll want to pay increasingly close attention.

Going my way

At one point, AT&T and Verizon were both largely land line telecommunications companies. Essentially, they owned the copper wires over which phone calls were made. That was a great business up until the point when the wires were no longer needed because of cellular phones. To their credit, both companies made the decision to shift gears.

So, for a long time, Verizon and AT&T were traveling the same path. Two industry giants shifting from land line to cellular. Because of their size and financial strength, backed by their legacy businesses, they've been able to dominate the cell business. Cell service in this country is basically a duopoly with AT&T and Verizon leading the way.

The cell business in the United States, however, is largely mature at this point. And that means AT&T and Verizon need to do something else if they want to grow.

The fork in the road

Where to go from here, though, is a question that can be answered in many different ways. AT&T has been doubling down on owning pipes. For example, it bought its way into the Mexican cellular market and acquired DirecTV. Both are interesting investments.

Mexico is basically an international expansion play, that happens to be right next door. While AT&T is a small fry in the Mexican market, it has the experience, name brand, and clout to be a real competitor over time. It isn't likely to be an easy path, but it's one down which AT&T has gone before.

DirecTV's satellite TV service, meanwhile, is a slightly different business, but one that fits well with what AT&T does overall. And it puts the company in a better position to deal with the content creators that use its pipes to reach consumers that are increasingly watching video anywhere and everywhere. So, the path that AT&T has gone down is pretty similar to the one it's been on-control the pipes to the end customer.

Verizon, meanwhile, has recently been doubling down on a different idea... Advertising and content. To do this it acquired AOL and is in the process of buying much of Yahoo! (NASDAQ:YHOO). It appears that the goal is to build up an advertising business that can compete with companies like Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and increasingly dominant Facebook (NASDAQ:FB).

The logic for this approach is solid, in that controlling advertising has been the key driver of Google's success. And, more important, it seems like a business that has a lot of potential as more people shift toward mobile, an area in which Google isn't as dominant. However, the way in which Verizon is choosing to compete is by acquiring laggard, and perhaps tired old, Internet brands. That's not to suggest that AOL and Yahoo! don't have loyal customers, but that their business models have been passed by newer competitors.

There's little doubt that Verizon has the financial strength to cobble these assets together. The question is more about what it will really be able to make out of the businesses it's buying. There's a lot of upside potential in many ways, as it could provide Verizon with a new and very different business to grow. But there's also more risk, because, in the end, this could all be wasted money, time, and effort if putting together struggling internet companies leads to nothing more than a bigger struggling internet company.

What to watch?

If you own AT&T or Verizon, what you need to pay attention to is changing. At one point it was the same for both companies, the cell business. Now, however, their paths are diverging and the question marks are increasingly different.

For AT&T you need to keep watching cellular, but increasingly need to think about growth south of the boarder. In addition, you need to think about the delivery of content in new ways, DirecTV, and how size helps create value for AT&T as it negotiates with content creators. These issues really aren't that new for the company, they are just a different variation on the theme. But they will be key, big-picture drivers of growth.

Verizon, meanwhile, appears to be going down a very different path. In the future you'll need to start thinking more about advertising and original content. That's a big change from Verizon's history. It could prove to be prescient, but it could also prove to be a huge waste of shareholder money, too. Either way, though, if you own Verizon you have to think about its future in a different way than you likely have been.

In the end, AT&T and Verizon are on increasingly divergent paths. If you own either, or both, the companies aren't the same as they were just a few years ago. And you'll want to increasingly pay attention to the changes being made. If you don't, you might wake up one day to find that you don't recognize the company you own anymore. And that could have major implications for the dividend payments you've grown accustomed to receiving.

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.