Dear Mr. Berko: I'm torn between investing $50,000 in AT&T and investing $50,000 in Verizon. My Merrill Lynch stockbroker is much more bullish on AT&T than he is on Verizon. However, the adviser who runs my retirement account at Northern Trust prefers Verizon. I have equal respect for both men and need you to be the arbiter. I also could invest $25,000 in each, as my wife suggested. — CS, Oklahoma City
Dear CS: What to do, what to do and what to do?
Both of these telecoms are rated A++ by Value Line, but one has had a better average annual total return over the past 10 years. If you had invested $50,000 in Verizon Communications in October 2008, when the share price was $30, and reinvested every dividend since, the accumulated value of your shares of Verizon Communications (VZ-$59) would be just about $152,000 today. That's an 11.5 percent average annual total return, good in anybody's book. If you had invested $50,000 in AT&T Inc. in October 2008, when the share price was $28, and reinvested every dividend since, the value of your shares of AT&T (T-$30) would be about $90,500 today. That's a 7.5 percent average annual total return. Though that's not shabby, VZ's average annual total return is 50 percent better. So during the past 10 years, VZ has certainly given its shareholders a much better total return than T. The reasons are that it has better assets, better employee training and efficiency, and superior management.
AT&T has 253,000 employees and expects to ink $172 billion in revenues on the books for 2018. That's $680,000 in revenues per employee. Verizon has 155,000 employees and expects to put $130 billion in revenues on the books this year. That's $860,000 in revenues per employee. In other words, each VZ employee produces $180,000 more revenue than a T employee. (So I don't understand why I'm put on hold for a dozen minutes whenever I call VZ's help desk.) This year, VZ's employees may be responsible for $19 billion in total income, or about $122,000 of profit per employee. T also expects to post a profit of $19 billion, but T's profit per employee of $76,000 pales in comparison with VZ's. There are other comparisons that argue smartly in favor of Verizon. But though Verizon has certainly provided investors a significantly better return than AT&T, perhaps it's T's turn to outperform VZ.
I'm told by a trusted source that the Justice Department's appeal of AT&T's $85 billion acquisition of Time Warner Inc. continues to fall flat on its bum. It's also Wall Street's consensus that the appeal will fall flat on its face. So AT&T now owns TNT, HBO, CNN and other Time Warner assets. T's management has begun to increase its spending on program content and upgrades to its networks, which should enable T to compete with streaming giants, such as Apple, Netflix and Google's YouTube. T's Time Warner division will begin to offer a wide range of attractive and exclusive product bundles that should build out its video business with DirecTV, which T acquired in 2015. And with Time Warner's highly desirable program content, T expects an uncommonly generous increase in advertising sales, which should improve earnings and dividend growth.
The wireless business is mature, and pricing is weak, and now T should begin to benefit rather nicely from the synergy of its Time Warner acquisition. The Street projects that T's revenue, earnings and dividend growth in the coming decade will outpace VZ's timid future growth. And T's current $2 dividend, yielding 6.5 percent, could grow to $2.58 by 2022. That would be an impressive 8.6 percent yield if you bought T at today's price. And the Street's four-year price consensus suggests that T could trade in the high $50 range. Just imagine a conservative blue chip equity that could become a very attractive growth and income stock. And VZ's 14.4 percent net profit margins won't hold a candle to T's expected 16 percent net profit margins by 2022.
Still, it makes good sense to straddle both sides of the fence. Take your wife's advice.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.