The Phone Giants Still Rule

Too bad there isn’t a clever portmanteau word to meld the names of the nation’s two biggest phone companies. Attizon or Veratt doesn’t roll off the tongue or please the eye the way Wintel (of PC fame) does. As far as investors are concerned, though, AT&T (symbol T) and Verizon Communications (VZ) are joined at the hip. In most respects, they are more similar than different. Both get tons of complaints about service, but they’ve produced heroic results for their shareholders.

Lately, though, some analysts have been carping that the stocks have gotten too pricey because of frenzied buying by income-starved investors. Most brokerages rate the pair some version of “neutral.” S&P Capital IQ recently had the audacity to slap a “strong sell” on Verizon, primarily due to valuation. S&P says to hold AT&T.

My View

Ignore the moaning over high share prices. Quality doesn’t come cheap, and AT&T and Verizon are terrific companies that are well situated to cash in on the explosive growth of wireless communications. You can buy now and bank on solid long-term returns. If you’ve been a shareholder for ages, perhaps even since the breakup of the Bell System in 1984, don’t hang up and stick yourself with a needless tax bill.

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True, you might not make much for a while. Both stocks are near their 52-week highs. AT&T, at $38, sells for 15 times estimated 2012 earnings, and Verizon, at $44, trades for 16 times earnings (prices are through August 3). The overall market’s price-earnings ratio is 13, so it shouldn’t be a shock if the stocks sit still for the rest of 2012, unless we get an all-hands year-end rally. Meanwhile, you’re paid well to wait: AT&T yields 4.7%, and Verizon yields 4.6%—better than the typical property-owning real estate trust, a rival for the affection of income seekers.

But there’s more to Big Telephone than big dividends. If Verizon and AT&T are not immune to cutthroat competition and disruptive technological change, I don’t know what is. They have brute marketing and financial force, technical know-how, the power to raise prices, and a limitless future. And they are overwhelmingly domestic enterprises, so problems in Europe and other places have little impact on their bottom lines. “The two are Darwinian victors and cannot be stopped,” says Steven Osinski, who has worked in the wireless industry since the 1980s and teaches business at San Diego State University. Competitors such as Sprint and T-Mobile, which AT&T unsuccessfully tried to buy last year, are weak and getting weaker.

A few years ago, some analysts thought AT&T had an advantage because it had exclusive rights to Apple’s iPhone. But now AT&T and Verizon both sell iPhones, as well as other devices. In other areas, the two are also as one. In June, Verizon Wireless overhauled its pricing so that you can pay one bill for all the services you access on multiple devices (Verizon Communications owns 55% of Verizon Wireless; Vodafone owns the rest). AT&T quickly announced a similar deal. Time will tell if consumers benefit, but both carriers will profit because the plans are designed to bolster data usage, which is potentially more lucrative than voice (see Smart Ways to Save on Smart-Phone Plans).

Bears think AT&T and Verizon shares will go the way of Intel and Microsoft and stagnate for a decade, maybe longer. They see the phone stocks once again trading at 10 times earnings or less. I’m not buying that. A single-digit P/E may have been appropriate for a slow-growing provider of landline phone service. But with each passing year, landline becomes a less significant part of the phone giants’ business. In fact, the slow death of the traditional voice business helps them because it saves on service and construction costs. AT&T and Verizon aren’t what they were a couple of years ago, let alone what they were in the last century. The pessimism toward their stocks is unjustified.

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