New Reasons To Buy Verizon Over AT&T

May.22.12 | About: Verizon Communications (VZ)

AT&T (NYSE:T) provides wireless and wireline telecommunications products and services to consumers, businesses, and other agencies worldwide. One of 30 stocks that make up the Dow Jones Industrial Average, AT&T has a massive market capitalization of nearly $200 million, and it had total revenue of almost $127 million in 2011. Its share price has decreased from around $40 five years ago to around $34 today, but it also increased by about 50% after reaching a low of roughly $22 in the autumn of 2008. So, where does it go from here?

One of the "big two"

AT&T is one of the two giants remaining in the wireless and wireline telecom industry. The other is its chief rival, Verizon Communications (NYSE:VZ). AT&T and Verizon, Verizon and AT&T. Like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) in the 1990s, it's just about impossible to mention one without the other. And, while I don't see much risk in AT&T as a buy-and-hold addition to your portfolio, if I was going to invest in one of these dividend paying, telecom giants, it would be, without question, Verizon.

AT&T, like Verizon, is diversified enough to be viewed as a safe investment. Whereas its other chief rival in the wireless space, Sprint Nextel (NYSE:S) gets about 87% of its revenue from wireless, AT&T gets only slightly more than half of its revenue from wireless, positioning itself as a national leader not only in wireless, but in wireline-cable, internet, and phone service to homes and businesses The privately held T-Mobile, a one-time acquisition target of AT&T, is the other serious competitor in the wireless space.

So, AT&T has a diversified revenue stream, 30 years of brand recognition, and it pays a nice 5.5% dividend. Why is it then, exactly, that don't I view it as a particularly strong investment? Quality. I believe that AT&T lags its chief rival, Verizon, when it comes to quality and speed of service, and I believe that the company has not yet seen the full impact of this on its customer base. In a recent study by the independent J.D. Power and Associates, Verizon was judged to be the overwhelming leader in network quality performance. And it was not a fluke. It was the 15th consecutive reporting period in which Verizon was ranked highest in the Northeast, for example. In the same study, AT&T was judged to have the worst quality - when it comes to statistics like dropped calls, text transmission errors, and slow downloads - in the Western region, and it did not place higher than second in any of the regions. This is no small potatoes. Many customers switched to AT&T in recent years when it was the sole provider of wireless service for iPhone users, and even though that exclusive agreement ended in February of 2011, I believe that many of those customers are still locked into long-term contracts with AT&T and plan to switch when their contracts expire.

When it comes to the increasing revenue segment of wireless data, Verizon and AT&T are the only wireless providers that offer LTE connection speeds, however, Verizon's LTE network is currently a lot larger than AT&T's, available in more than 200 cities throughout the U.S., versus only about 30 cities for AT&T. In a world distinguished by the ever-increasing need for rapid access to data, Verizon provides it better than anyone. I believe that having the largest real 4G network, along with its best-of-breed cellular coverage and reliability, will begin to win early iPhone adopting customers from AT&T after their contracts expire and they realize the headache of switching wireless providers is the best decision for the long run.

AT&T's largest competition in wireline - home phone, internet, and cable television - comes not only from Verizon, but from large regional cable providers, such as Cablevision Systems (NYSE:CVC) and Time Warner Cable (TWC). AT&T provides wireline service to homes and businesses through standard coaxal cable lines, whereas Verizon uses faster, but more expensive, fiber optic lines, branded by the company as FiOS. Even though FiOS is faster than standard cable lines when it comes to both download and upload speeds, laying thousands of miles of fiber optic cable has been a slow and expensive process for Verizon. Verizon's FiOS, in fact, is still only offered in limited markets, and the slow roll-out has been a good thing for AT&T, to date. But I believe that Verizon's investment in these high-speed transmission lines will eventually pay off. Wireline service providers typically don't have large differences in price or variety of options, so I believe that consumers will pick them based on speed and reliability going forward, two areas where Verizon wins.

Beyond the obvious

AT&T is a juggernaut of the wireless and wireline industries, no question, but how is it diversifying beyond that? Verizon, for example, announced in February a joint venture with Coinstar (NASDAQ:CSTR), the owner of the self-serve DVD kiosks branded as Redbox. The two companies are set to begin a partnership in the second half of 2012, whereby Redbox gains the benefits of Verizon's on-demand streaming video, and Verizon gains access to Redbox's growing kiosk customer base. Verizon owns a 65% majority ownership share in the joint venture. I believe this partnership, along with the presence of companies like Netflix (NASDAQ:NFLX), will leave AT&T on the outside looking in, when it comes to the growing industry of home entertainment revenue.


I would not be a buyer, or a seller, of AT&T at its current price of around $34. With a dividend yield of nearly 6%, and a well-diversified business model, I believe that AT&T is a relatively safe buy-and-hold stock. But potential investments should always be judged against the alternatives, not in a vacuum, and if I was putting new money into the telecom space, I would rather put that money into Verizon, the company that I believe is best positioned for success in the next decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.