Verizon Vs. AT&T: Cramer Picks a Favorite
A diversified portfolio means that investors shouldn’t really own both, but how to pick?
While both have components that are very similar, the two companies actually are quite different.
“For example, Verizon only owns 55 percent of its wireless business, while AT&T owns the whole thing,” Cramer said.
Also, each company is pushing into a different direction. Verizon has been buying data centers and owns wireless spectrum, Cramer noted, while AT&T had a head start on the iPhone business.
To find out which company is the better deal, a little homework is needed.
“In the latest quarter both companies reported strong wireless results, but whose were better?” Cramer said.
While the industry is experiencing lower “churn,” or the percentage of subscribers who leave during the quarter, Verizon’s came in at 0.84 percent, while AT&T’s was 0.97 percent. But low churn also means fewer new subscribers, something the iPhone 5 could change.
Cramer said the real standout part of the wireless business was the margins.
“AT&T’s wireless margin came in at 45 percent, Verizon’s was 49 percent, but they calculate those numbers differently, so on an apples-to-apples basis, their wireless margins were roughly equivalent,” he said. “That’s very good.”
Yet both companies were looking to reduce the subsidies on phones, which could mean higher profits.
“Counterintuitive, I know, but because of the expensive phone subsidies for all new customers, it costs plenty to sign up additional people, while it's pure gravy to simply keep re-signing the old ones,” he said.
On the dividend yield, AT&T is the winner with almost 5 percent, compared to Verizon’s, at 4.57 percent.
Valuation also appears the same.
“AT&T trades at 13.9 times next year’s earnings. Verizon sells for 15.6 times those numbers,” Cramer said. “However, when you factor in Verizon’s slightly higher growth rate, their valuations are roughly the same on a PEG ratio basis—so it’s a tie.”
There’s also another factor.
“Verizon’s wire-line biz disappointed in the latest quarter, whereas AT&T wire-line results were decent,” he said. “In fact, Verizon noted that the pace of new customer acquisition could slow for FiOS, whereas AT&T’s U-Verse has been taking share, adding 155,000 net new subscribers, versus just 120,000 for Verizon’s FiOS.”
Looking at 4G, Verizon’s been buying electromagnetic spectrum to support its network, but AT&T hasn’t done much on the spectrum front.
That gives Verizon the advantage.
Finally, there’s the Apple factor.
AT&T’s exclusivity with the iPhone gave it a serious smartphone advantage – penetration of 62 percent vs. 50 percent for Verizon.
All told, AT&T has the clear advantage.
“It’s clear AT&T is the superior company with a higher yield and a cheaper stock,” he said. “To me, that’s no contest, until, of course, Verizon's stock comes down in price versus AT&T, and then we start making the salad all over again.”
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