Verizon Is Not Worth 36% More Than AT&T

5/28/19

Summary

  • VZ trades for 12.3x earnings while T trades for just 9x earnings. I don't think this makes sense.
  • Because of this weakness, T's dividend yield is much higher than VZ's.
  • Looking at the fundamentals, it appears that VZ is the better operator, but not 36% better.
  • This idea was discussed in more depth with members of my private investing community, The Dividend Growth Club . Start your free trial today »

To avoid any confusion, I want to use the first sentence of this piece to make it clear that the 36% that I’m referring to in the title of this piece has to do with the P/E ratios that the market has placed on these two telecom companies. Right now, Verizon (VZ) trades with a 12.3x TTM P/E ratio. AT&T (T) trades with a 9x TTM P/E ratio. Obviously, there are other ways to evaluate these two companies, though for mature, mega cap names in the telecom industry, I think P/E ratio makes as much sense as any when looking for valuation metrics. I believe that both Verizon and AT&T are great companies. I’m long shares of both. Yet, my position in AT&T is much larger than my position in Verizon, in large part, because of the huge valuation gap that can be found between these two companies. When I look over their operations, their growth prospects, and their balance sheets, I simply can’t rationalize the P/E divergence between these two names.

T and VZ are the two dominant telecom players in the United States. Both companies are well known for their free cash flows. And that’s a good thing, because with the 5G revolution just around the corner, both of these companies will have to make huge investments into their wireless infrastructure to implement their 5G networks. Both companies have a rather sordid history in terms of their M&A activity, though I will admit that recently, AT&T has made much larger bets on outside growth than Verizon has.

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