Analog spectrum boosts AT&T (T) and Verizon (VZ)
Here, the contributing editor to Leeb's Income Performance Letter explains why AT&T (T) and Verizon (VZ) are poised to be the biggest beneficiaries among leading telecoms.
"Customers are increasingly are seeking lower-cost services and delaying purchases of more costly equipment.
"But the companies are adapting, particularly through cost cutting and strengthening their balance sheets by paying down and restructuring debt.
"AT&T and Verizon, the telecom industry leaders, were the big spenders for rights to the powerful analog signals when the FCC auctioned off much of the freed-up spectrum in early 2008.
"Among the plans for the telecoms' newly acquired assets is creation of a nationwide wifi network, giving users of the many new smart phones access to faster wireless broadband internet. With the benefit of increased mobility, subscribers likely will increasingly sign up for higher-cost data plans.
"Verizon spent the most ($9.6 billion), including purchase of the biggest nationwide block via Verizon Wireless, its joint venture with Vodafone Group. AT&T was the other big spender ($6.6 billion).
"Verizon plans to roll out its new network starting in 2010, AT&T in 2012. If developed effectively, these investments should fuel new wireless growth for both companies.
"Future growth will come from Verizon's wireless business as more subscribers are added and packages are upgraded to include increasing text and data use. This growth will be enhanced via the company's spending in the analog auction.
"For income investors, Verizon's appeal is also based on the company's stable cash flow from both the wireline and wireless businesses. This, in turn, means that the dividend should remain safe, even through the trials of our current economic storm.
"Verizon shares carry a current yield of 6.4%. Beyond that, the shares are trading near their lowest level of the last seven years.
"AT&T is the largest telecom company, with $124 billion of revenues. Its wireless operation, at $43 billion, accounts for a smaller percentage of sales than at Verizon. But AT&T is the largest broadband provider.
"And while AT&T relies more heavily than Verizon on its wireline business, the company has been able to keep those sales steady at $71 billion over the last couple of years as customers adding data connections and other services have made up for those who drop service altogether.
"AT&T shares currently pay 6.9%. As with Verizon, the dividend should be safe, and the shares trade near their lows of the decade."
The Stock Advisors