Verizon and AT&T Have Traded Places

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We have a track record and a long track record of 18 straight years of dividend increases, and that's a record we're very proud of. And our goal is to put the board in a position to increase the dividend once again for the 19th straight year.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Tony Schiattis. He's the CFO of Verizon, and he's talking about the dividend. It's a biggie. I saw recently that Verizon had the 11th largest dividend yield in the S&P 500. It's just over 6%. And to hear Tony, the payments sound reliable. Verizon stock looks a bit like AT&T did early last year when we talked about it on this podcast. Since then, there's been a switcheroo. AT&T has run up, Verizon has fallen behind. The stock looks cheap. Could Verizon be due for a bounce? In a moment, we'll hear from Tony and we'll get the bull case from a Wall Street analyst. We'll also hear about a tiny fiber broadband stock that could be a takeover target. And speaking of Target, I'll have a couple of quick comments about the retailer Target and about drinking. Probably start with Target and drinking. Listening in is our audio producer Alexis. Hi Alexis.

Hi Jack.

Any business we need to get to before I turn to Target and drinking?

Yeah, I think you should tell the people about how you almost hit a bird.

Well, yeah, I did almost. I guess it was a waterfowl and it was with my car. I was talking to you. I was in the car. I was driving past a pond. Near me and I think it's a heron. I'm not a bird expert, but it was one of the big leggy ones that takes a long time to take off because it's so big. And it took off from one side of the road moving toward the pond just as the car was coming. And it just— the car just missed it. I thought the windshield— I thought it was going to, you know, I almost hit a bird, but thank goodness I didn't. The bird's okay. I'm okay, too.

I think besides the screaming, You did a great job. You maneuvered well.

Yeah, it was a close call. You got to be vigilant around here. Deer, could be raccoons, slow-moving waterfowl, what have you. Now, speaking of foul, Target earnings this past week, a 6% decline for the stock in reaction to earnings. That makes this the, let's see, 1, 2, 3, the 4th decline in a row on earnings for Target. It's been 5 out of the past 6 quarterly reports. We talked about Target on this podcast around the end of June. We heard from Seth Sigmund over at Barclays about why a turnaround for Target looks difficult, and we heard from our own Sabrina Escobar at Barron's. I'm not going to get too deep into the results. There was a sales decline. It wasn't as bad as previous quarters, and the company announced a new CEO. You think that would be a welcome sign that the company is ready to make the big changes it needs to get things going again. But the board appointed as CEO a longtime company insider. So I guess the view of investors is that the change that is coming might not be changey enough. We'll keep an eye on it. Now, drinking. Remember we did a whole thing back in February this year about how drinking rates have plunged, especially among the young? Well, there are new numbers out on drinking. They come from Gallup and they show another stark decline. Only 54% of U.S. adults say they consume alcohol. That's according to survey results released this month. And it's the lowest percentage in 90 years of collecting data. And the people who are drinking say they're drinking less. Alcohol stocks are mostly lower since we talked about this back in February. I think you can tell a lot about what's coming for alcohol consumption by what young people are doing now. Look at what's happening for high school seniors. Yes, high school seniors are too young to legally drink. That was the case when I was a high school senior around, let's say, 35 years ago. But it seemed like there was an awful lot of kids buying cheap beer and making bonfires out in cornfields and playing American Pie. And I don't know, this is according to sources close to the matter. But there's a separate survey on youth drinking. It comes from the Institute for Social Research at the University of Michigan. The data starts in 1997. That's well after I had graduated high school, but even by then it found that 75% of high school seniors said they drank alcohol. By last year, that 75% had fallen all the way to 42%. That sounds like a good thing if fewer high schoolers are drinking alcohol, and I guess maybe it's a good thing health-wise if consumption is declining across most age groups. It's just something to think about for investors if you're eyeing one of these stocks. Okay, that's Target and drinking. Let me move to an update on AT&T. We talked about AT&T in March of last year. What was, Alexis, the title of that episode?

The Bull Case for AT&T.

Yeah, I feel like even that phrase was a fairly controversial thing at the time. The bull case came from Wolfe Research analyst Peter Cepino, who spoke with us on the podcast. And I wrote about AT&T at the time for Barron's Magazine. The company has this unbelievably complicated history and a record, I think, of squander and folly, jumping into show business, bailing out of show business. And Peter's case was basically this: AT&T is now squarely focused on the phone business and the fiber broadband business. And also telecoms in general are past the peak of their 5G spending. So there's a lot more cash flow that has been freed up. AT&T back then had a giant dividend, over 6%. As Peter put it back then, it might be the best stock even if it's not the best company. All AT&T had to do was keep paying down debt and keep rolling out more fiber. That's become a great business for the telecoms. As people have canceled their pay-TV bundles with cable, cable companies have raised prices for broadband-only service. That made home broadband a pretty lucrative business. The wireless carriers have swooped in and that's helping with their growth at a time where there's not many gains to be had for wireless subscribers here in the U.S. Okay, so I checked the other day and AT&T, since the column that I wrote in Barron's back in March of last year, has returned 87%, and that has led the other two big players. T-Mobile has returned 62% and Verizon 26%. Verizon's actually a point behind the S&P 500, but it looks a lot worse if you strip out dividends. If you do that, then Verizon has lagged behind the stock market by 10 points. And over the past 5 years, if you strip out dividends, Verizon is the only one of the big 3 telecoms that declined in price by 24%. This is a classic Trading Places situation. Alexis, you are no doubt familiar with the 1983 movie starring Dan Aykroyd and Eddie Murphy.

No, for sure.

Sure.

Um, no, I'm coming up blank.

I love hitting you with '80s movies. It's a Wall Street classic. Dan Aykroyd is a commodities pooh-bah, and through a twist of fate, he winds up behind bars.

This is outrageous. What are you doing? I haven't done anything wrong.

And Eddie Murphy is kind of this hustler. He ends up moving into the other guy's job and home. Curtains, man.

Look at the curtains. It's beautiful the way I got this place set up, man.

And in the movie, what happens next involves a gorilla suit, and a call girl and a lot of orange juice futures. I don't see that happening in this case, but I do think we could be headed for a higher share price for Verizon. Verizon is, I guess, the Dan Aykroyd in this case. This is the wireless carrier that was long able to charge the highest prices because it had the best and most reliable service. And so it had the highest quality customer base. That's not a moral judgment. I just mean the people who can afford to pay the most. And AT&T was a long-time dog. The stock went just decades with lousy returns. And so now AT&T is riding high. It has actually become a consensus buy on Wall Street. 60% of analysts who cover AT&T recommend a purchase of the stock. That compares with only 44% for Verizon. The rising share price has squished AT&T's dividend yield down to, let's see, 3.8%. And Verizon's yield has increased over time. It's now just over 6%. Verizon traded recently at 9.4 times forward earnings estimates. At that price, it's trading at a 30% discount to AT&T. 5 years ago, it traded at a 30% premium. A starting valuation as low as the one for Verizon right now can make up for a lot of flaws. This was until recently the telecom leader. So what has gone wrong here and what are the chances of it getting fixed soon? For that, I reached out to Frank Luthan. He's an analyst covering telecom at Raymond James. I'll bring you that conversation and some comments from Verizon's CFO right after this quick break.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Welcome back. So Verizon looks cheap. We're trying to figure out what has gone wrong. One thing I learned from my conversation with Frank Luthan at Raymond James is it's not really as much as you might think. Verizon had some big competitive advantages in some markets, especially rural markets where it had very high market share. Now T-Mobile has become the industry insurgent, especially after it combined with Sprint, and AT&T has improved its network. So Verizon has faced more competition in some markets. The playing field on price and network quality looks pretty even recently. There's also a big buyout in the works. In May, Verizon won regulatory approval for a $20 billion purchase of Frontier Communications. That's going to add millions of new fiber broadband customers to Verizon's already large base. In the near term, of course, that Frontier purchase is gonna cost Verizon plenty of money. Investors might be waiting to hear more from Verizon about its plans for spending and growth. One last thing here quickly, and it's about T-Mobile. In July, KeyBank Capital Markets downgraded that stock for the second time in a year. This time it went to underweight on T-Mobile. A couple of reasons. It is the most expensive stock of the group by far because in the past it has been the fastest grower. KeyBank finds that T-Mobile is no longer offering big discounts at the mid and high tiers of telecom service. In other words, it might not be able to keep up the same growth rate. But the main thing it points out that it doesn't like about T-Mobile is it calls the company fiber deficient. Verizon and AT&T have big installed bases of fiber broadband service. That's become really important, not just because it's a good business on its own, but because telecoms have found that when they bundle fiber broadband with their wireless service, Then they find that churn rates— in other words, customer defections for both services, wireless and broadband— churn rates decline. That's good for business. So everyone's in a hurry to get more fiber broadband. That includes T-Mobile, but it's starting from a very low base. Okay, that's enough yammering for me. Let me get to my conversation with Frank at Raymond James. He rates Verizon at outperform. He says investors want to see a return to wireless subscription gains and that the company has taken steps to get there. He's optimistic about how Frontier will add to Verizon's broadband subscribers.

They have 18 million today. They are acquiring a company called Frontier that will get them to about 28 million. And they've said they have a pathway to getting to 35 to 40 million. As far as where we see the competitiveness going forward, having that ability to do that bundle is very important to the carriers. We've seen all three of them make acquisitions in the last 12 months to try and get access to that.

The Frontier deal, if I understand you correctly, customers want to buy this bundled service where they get their fiber broadband and their cell phone service together. And the Frontier deal will allow Verizon to sell that in new markets where it's not currently able to sell that today. And that's going to help. Is that right?

Exactly. Well, they'll be able to sell it bundled, so they'll have access to that customer base and offer them something, a discount to kind of keep— make sure they stay with Verizon. And then as new marketing goes forward, they'll be able to either, you know, go to existing Verizon Wireless customers in the market and say, hey, we're back. We have these assets as they build out new markets and upgrade the copper to fiber. They'll have that opportunity. So this is an investment theme that's going to go on for a while.

I mean, that's a wonderful business, is it not? The fiber to the home for the telecoms. First of all, the cable companies, as people were cutting their pay TV, the cable companies were raising prices on their broadband-only service to the home, which kind of gave telecom a lot of room to come in and sell at attractive prices. And, you know, my understanding is that telecom is really creating a problem for the cable companies right now because that service is competitive and it's very sticky. The customers, once they sign up for that service, they tend to stay around and it's decent margins. Is my assessment there accurate? And is that a good source of growth going forward for telecom in general and Verizon in particular?

Yes, absolutely. It definitely is. And Verizon has a long history of this. They were the first ones to launch a fiber-to-the-home product 20 years ago, maybe a little more than 20 years ago. Ago with their Fios product, and they've got all that history with their Fios footprint to see how this bundling works. And it absolutely does take share. The US consumer is really looking for a choice. So over the last 20 years or so, the cable companies have had 85% market share for broadband. And when you have a market share that high, eventually it's only going to go in one direction. The analogy I kind of use with investors is if, let's say, one of the major airlines decided they weren't going to bother flying to New York or Florida, Just nope, we're not gonna go to those markets. Those are huge markets and they just stayed away. Well, when they make the decision to change, that market share's only gonna go in one direction. So that's the issue for the cable companies. Market share is gonna balance out over the next 5 years. And these are very good margins for the telcos. And we believe they will easily get over 35% market share of broadband. Anywhere where they have DSL, you're starting from sub-10%. Then that increases your profitability on the wireless side of the house. It's a very, very good scenario for them.

What's going to happen from here to make you correct on Verizon stock? In other words, you're bullish. The stock looks cheap. Is it just that investors are sleeping on it and they're going to come to their senses and say, you know, wait a second, it's a little too cheap? Or is Verizon going to stabilize those market share movements? Is it going to find a way to claim back some share? Is it going to grow better than expected? What has to go right and what do you think will go right?

It's really gonna get down to the wireless subscriber adds. They have taken what I believe are the appropriate steps to try and stem some of the bleeding and to take some of that market share back. I do believe when they close the Frontier deal next year, and as they continue to bundle with fixed wireless, they'll have that ability to do that. It's just a lot, it takes a while. It's like turning an aircraft carrier. It takes time for these things to turn around and they're the market leader. So as the largest one, they've got the biggest target on their back from a wireless subscriber standpoint. We think it's just going to take a little longer. So our rating is really more on a 12 to 18 month outlook, and we think that in that time frame they can see improvements in that. And that's what will drive the stock, is the improvements on the wireless subscribers.

This has been most helpful, and thank you. One last question: could you tell me what's your favorite stock under your coverage? Can you give me, uh, the company and a couple of bullet points about what you like?

Yeah, so it's sort of related to this. Our top idea is Uniti, and the ticker symbol is UNIT. And this is a company that is going to also sort of participate in this fixed mobile convergence, we believe there, there's an opportunity. The company recently recombined its assets with a company called Windstream. That is an ILEC that is doing a very similar upgrade of copper to fiber as Frontier did. So similar to what you saw last year with Verizon buying Frontier, this is another asset that we think is going to be attractive to some of the carriers over the next year or two that could also be acquired. And we believe that this has been a little bit of an orphan stock. It was a real estate investment trust, a REIT. It still shows up under some REIT codes. Once those REIT codes go away, as it is going to be a C corp, we think a lot of investors are going to look at this and figure out, hey, this looks a lot like Frontier, and these assets here are very attractive to the various carriers. We've seen AT&T and Verizon. We've seen others like Bell Canada that I do not cover, but they acquired another US company, Rurallec, out there, maybe even T-Mobile. Other companies here have all made acquisitions, and this is another one that looks just like that. As they're upgrading that fiber. It's very attractive for one of these wireline carriers to own. So we think there's, there's some potential upside there. But that's one that they recently closed that deal. I don't think investors have fully figured it out yet, and we think that stock has some significant upside.

Thank you, Frank. That stock that Frank mentioned at the end, Unity Group, that's a tiny company and it has been on a wild ride recently, not really in the right direction. The share price was recently around $6, And Frank this month raised his price target from $8 to $11. If you look into that one, make sure you have the risk appetite for it. I wanted to hear from the brass at Verizon about how safe the dividend is for one thing, but also what the company thinks it needs to do differently to gain appeal with investors. Let's hear from CFO Tony Schiattis.

We have a resilient business that can operate in any environment, including all the, uh, the craziness that we've dealt with this year with tariffs and and all that stuff. And our segmentation strategy is working, and that's demonstrated in the results. We come from a position of strong financials, and we said we're going to take share where it makes sense to do so, but we're not going to overpay for growth. And, you know, we have a very high-quality customer base, and we're very bullish about the future. And that future includes continuing to deliver both growth in mobility and broadband as we bring Frontier into the fold. So we're excited about our prospects for long-term sustainable growth.

The dividend yield is high. I mean, I think, is it in the 6% area or thereabouts?

Yeah, it's around 6%. That's right.

How would I describe that? Like a high dividend yield is attractive until it starts to become suspicious. I don't think you're in suspicious territory. I think you're in attractive territory, but I don't want to guess. I want you to tell me, how would you characterize that dividend and how investors should feel about the security of the payments going forward?

Well, I'll step back and talk about our capital allocation framework. And we have 4 capital allocation priorities. The first one is to invest in the business. And you see us doing that with our network investment day in, day out, year in, year out. We're going to spend between $17.5 and $18.5 billion this year in our networks. Our second capital allocation priority is our commitment to the dividend. And as you said, we have a track record and a long track record of 18 straight years of dividend increases. And that's a record we're very proud of. And our goal is to put the board in a position to increase the dividend once again. For the 19th straight year. And then our third priority is to continue to have a strong balance sheet and pay down debt. We've made a lot of progress. We've paid down over $7 billion in unsecured debt over the last year. So we continue to drive towards our long-term leverage target. And then what we said is once we get to our long-term leverage target of 2.25 times, we would consider share buybacks. We're not quite there yet and we have to ingest the Frontier deal, but we've made a lot of progress. And what we said is when we get closer to that leverage target and inside that leverage target, we come back to the market on what's next. But to answer your question, we're very proud of the dividend and we have strong cash flows year in and year out. We raised our cash flow guidance this year to $19.5 to $20.5 billion and feel very comfortable with our dividend payout ratio.

When I look at telecom in general and Verizon in particular, the business to me seems to be in a good place. And the big investments like these huge dollar outlays are— some of them are kind of in the rearview mirror where the companies are unlocking better cash flow. And so I look at Verizon, I think I saw you recently trading about 10 times earnings or a little lower. And although the stock hasn't been a disaster, some of the others have run ahead. When you look at that, do you think that investors are not getting something about your company, or do you think your company has to deliver something different to get their attention? What do you basically think about the outlook for unlocking some more return for shareholders going forward?

Yeah, I think it starts with the strong execution and delivering on the results and delivering on our guidance. That's a huge priority for us. And as you saw in the first half of the year, we're very much on track with our guidance. And we raised our guidance for the full year, even in light of, you know, all the tariff noise and everything else. We raised our EBITDA, our EPS, and our free cash flow guidance. And that's based on the execution that we've had in the business. So I think, you know, we are seeing positive results from that. I think folks are, you know, waiting to see what we're going to do with Frontier. And what we said was, as we get line of sight to closing the deal, deal, we'll come back with what our aspirations are around our fiber deployment longer term, what our capital expenditures look like longer term, and what our capital allocation framework looks like longer term, and our growth prospects on a pro forma basis. So I think folks are waiting for that, and we'll bring that, uh, very soon, as soon as we have line of sight to closing the Frontier deal.

What does the Frontier deal do for you?

Bringing Frontier into the fold gives us more scale on broadband, and we're really excited to continue to expand our reach on broadband. We think fiber is a great asset and continues to win in the marketplace, and we continue to take meaningful share. We put on over 600,000 broadband customers in the first half of the year, and, you know, fiber is a superior product and it wins day in and day out against cable. So we feel very bullish about the prospects and look forward to closing the transaction hopefully by the first quarter of 2026.

Thank you, Tony, and thank you, Frank, and of course Alexis and Harrance, if they do in fact live in Westchester County, New York. I suppose I could just Google that. If you have a question that you'd like played and answered on the podcast, and if it's about finance and not birds, just send it in. It could be on a future episode. Use a voice memo app on your phone, send it to jack.hough@barons.com. Thank you all for listening. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. And if you listen on Apple, you can write us a review. See you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.