Verizon Versus T-Mobile

T-Mobile (TMUS, Financial) and Verizon (VZ, Financial) are two different companies and face different situations when it comes to earnings and growth. During 2013 T-Mobile earnings were crushed and have slowly recovered while Verizon experienced high earnings growth in the same period from 2013-2014 after its earnings suffered a sharp decline from 2010 to 2012. Verizon's earnings have flattened out from their $4.81 EPS high in September 2014.

Verizon EPS 2005 to 2015
2005 – $2.63
2006 – $2.12
2007 – $1.90
2008 – $2.25
2009 – $1.71
2010 –Â 89 cents
2011 –Â 85 cents
2012 –Â 31 cents
2013 – $4.00
2014 – $2.51
2015 – $2.51

T-Mobile EPS 2005 to 2015
2005 – $1.11
2006 –Â 2 cents
2007 –Â 44 cents
2008 –Â 84 cents
2009 –Â 98 cents
2010 – $1.07
2011 – $1.64
2012 – $(-)28.03
2013 –Â 30 cents
2014 –Â 29 cents
2015 –Â 60 cents

T-Mobile's earnings are only a little more predictable than Verizon's. In the last 10 years T-Mobile's EPS have declined three of those years, in which the biggest drop was in 2012 when earnings dropped from $1.64 in 2011 to negative $28.03 in 2012 (The company lost 205,000 subscribers in the second quarter of 2012) . Verizon's earnings, on the other hand, show no stable upward trend. Verizon's future earnings cannot be predicted. While the company might have some merit, lack of strong earnings shows that Verizon's future earnings would be impossible to predict with any amount of accuracy.

Currently T-Mobile is trading at $37.54 a share against earnings of 60 cents a share. If you paid $37.54 for a share of T-Mobile, your initial rate of return would be 1.6% ($0.60 / $37.54 = 1.6%). Verizon is currently trading at $45.01 a share against earnings of $2.49 a share. If you paid $45.01 for a share of Verizon, your initial rate of return would be 5.5%.

In 2005 Verizon had earnings per share of $2.63 while T-Mobile had earnings per share of $1.11. Ten years later in 2015 Verizon has an EPS of $2.51 and T-Mobile an EPS of 60 cents. For Verizon you get a negative annual compounding rate of -0.47% versus T-Mobile's -5.97% compounded. From 2010 to 2015 T-Mobile's earnings shrunk -5.62% annually while Verizon's earnings grew by 23.04%. These two numbers tell you several different things about each company. The first is that Verizon has had a higher rate of earnings growth in the last five years than it did in the 10-year period from 2005 to 2015. The questions that need to be asked are: What caused this change? What changed in Verizon's business economics? The questions that needed to be asked about T-Mobile's decline are: What caused the earnings decline in the last five years? What changed in the company?

From 2005 to 2015, Verizon's net income grew from $7.39 billion to $10.26 billion, or at annual compounding rate of 3.34%. In the same time period T-Mobile's net income went from $198.68 million to $537 million, growing 10.45% annually for the last 10 years. In 2014 Verizon had shareholders' equity of $3.02 a share and net earnings of $2.36 a share. This means that each share is yielding a 78.10% return on shareholders' equity ($2.36 / $3.02 = 78.10%), of which approximately 7% was retained by the company and 93% was to be paid out as a dividend to the shareholders.

So, when you buy your Verizon share with a per share equity value of $3.02, you can calculate that your investment would effectively earn a 78.10% return. You can also figure that your 78.10% return is divided into two different types of yields. One yield would represent 7% of the 78.10% return on shareholders' equity and would be retained by the company. This amount is equal to 16 cents of the $2.36 in per share earnings. This piece of the yield is the after-corporate tax portion and will not be taxed on the state or federal level. The other yield is the remaining 93% of the 78.10% return on shareholders' equity, which is paid as a dividend. This amount equals $2.19 of the $2.36 per share earnings.