American Tower May Buy Verizon's Towers; Here Is The Better Investment

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Includes: AMT, VZ
by: Alan Goodman

Summary

Verizon has a 4.5% Dividend and a P/E ratio of 10.5.

American Tower pays 1.5% with a P/E of 53.

With continued growth rates the break even point is in the sixth year.

If you are an income investor, it has been pretty hard to regret owning Verizon (NYSE:VZ) over the last 6 years as they have paid out substantial dividends while more than doubling in value. This information comes from the Yahoo Finance website which shows the price increasing from $21.40 at the close on 10/1/2008 and $48.98 at the close on 10/1/2014. No stock splits during this period. During the same period investors reaped $ 11.67 in cash dividends for a total return of $183% assuming dividends were not reinvested. The S&P 500 returned closer to 110% during the same period. While that is nothing to sneeze at, consider a retiree that had $10k invested over the same period. The difference in return is over $7k. Of course looking forward as we must an index of 500 stocks the S&P is diversified and potentially less volatile.

Over the same period there has been a lot of discussion of the decreasing cash flow from landlines at both ATT (NYSE:T) and VZ as they divest much of the more rural areas to the likes of Windstream (NASDAQ:WIN) and Frontier Communications (NYSE:FTR). At the time of writing this article, VZ was down almost 10% from the 52 week high of $53.66. It is hard to differentiate as to whether this drop is related to market expectations of the stock, or the market as a whole. As VZ has continued to increase their dividends the message is that the dividend is safe.

At this point it looks like VZ will be selling their towers to the American Tower Corporation (NYSE:AMT) for $6B and leasing back the space. The details of the actual price, changes in debt structure, income and dividend payout are not yet clear, but it is known that VZ has almost $90B in debt and could retire more than 6% of that while AMT has $14.5B in debt and most likely will increase that to $20B. The details will be announced around the time of the agreement in price for the transaction. It seems reasonable that a prudent person will expect the management of the two companies will be able to continue to keep their respective growth rates in top line, and most important to the income investor the bottom line and dividends. This demands an analysis of continuing to own VZ or following the towers to AMT.

VZ has a market cap of $203B with a P/E ratio of 10.5. AMT is much smaller with market cap of $37.5B and a much higher P/E of 53. For comparison the S&P P/E ratio had averaged around 19 lately. For a value investor (typical of income investors) VZ looks to continue to be a winner with the low P/E ratio, high dividend of 4.5% as compared to the much higher P/E ratio and lower 1.5% dividend at AMT. Here is where your expectations of the future come into play.

It is impossible to know the stock price of an individual stock going into the future but conclusions of the expectations of the market are shown in the data and ratios. VZ with its low P/E indicate an expectation of the return will be lower than a stock like AMT with its high P/E ratio. To the income investor, the change in the price of a stock is less important than the current returns. Comparing the growth rates of the dividends of the two companies yield some very interesting information. Again, there is no guarantee of the future performance and if you can afford it, diversifying through ownership of less volatile investments can be wise. That said, the average annual growth rate of VZ dividends over the last 6 years is 4%. AMT has a much higher average compound growth of 25%. Carrying out those rates from today and extrapolating it into the future you will find that in 6 years the dividend paid by AMT will meet and exceed that of VZ. In under 10 years VZ could offer a dividend payout of 6.4% (of today's price) versus over 11% for AMT. These rates will be higher if dividends are reinvested but the assumption is that we are talking current income here. Both stocks qualify as "big" or "large" cap stocks which are generally defined as those having market caps over $10B. The smallest Fortune 500 member has a market cap (changes daily) of just under $10B.

So here is the bottom line. If you are an income investor that requires the current dividend of 4.5% that you are getting from VZ, you likely have to keep your funds there and can be confident that the dividend is safe and expect continued growth in the stock price. If you have some risk tolerance and can wait up to 5 years for the equivalent dividend rate to catch up and you have any faith at all in AMT's management you will have to consider the possibility that the stock will grow substantially along with the dividend payout. If not, perhaps you should consider a small investment coupled with a reinvestment plan and reevaluate annually.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.