By Miriam Gottfried
With the Federal Reserve continuing to clamp down on interest rates, scavenging investors are starved for yield. Telecommunications companies, with their ripe dividends, are one likely place to look for sustenance.
Verizon Communications (VZ) and AT&T (T), for example, carry yields of 4.6% and 5%, respectively. Those are pretty chunky payouts considering that 10-year U.S. Treasurys offer less than 1.7%.
One question for the really ravenous investor, though, is which of the two will do a better job growing its dividend in coming years?
AT&T has steadily raised its dividend for 28 years and supplements this capital return with stock buybacks. But when it comes to the possibility of accelerated dividend increases, Verizon looks better positioned than its rival.
A larger-than-normal dividend rise isn't likely to come this year. But analysts at Macquarie say Verizon shareholders could see a one-time, 10% increase in the dividend in 2013 or 2014. AT&T is more likely to continue with its regular but more-sedate pace of dividend increases.
A reason for the difference is free cash flow. Verizon's is expected to climb 29% in 2013 and 14% in 2014. That compares with expectations of declines of 2.4% and 1.1%, respectively, for AT&T.
Both Verizon and AT&T are benefiting from rising wireless prices and greater discipline in handset-upgrade policies. Verizon recently rolled out a plan offering unlimited voice and text messages along with shared data pricing tiers, effectively protecting fast-growing data revenue. Analysts say AT&T is likely to adopt a similar pricing plan soon.
But Verizon remains the faster-growing of the two, with sales expected to rise 3.8% in 2012, compared with 1.3% for AT&T. Thanks to that and high margins at its 55%-owned Verizon Wireless, Verizon's earnings per share are expected to rise 16% in 2012 and 12% in 2013. That compares with 8.6% and 7.1%, respectively, for AT&T, whose growth is held back by its higher exposure to traditional-phone customers.
Verizon's 12- to 18-month lead over AT&T in building out the high-speed mobile broadband network known as 4G LTE could help it reel in subscribers after the expected introduction of Apple's iPhone 5 this fall. AT&T, meanwhile, has been investing heavily in its 3G wireless network, offering faster data speeds on the network that most customers currently use.
Granted, investors pay more for Verizon. It trades at 16.4 times forward earnings estimates, compared with 14.2 times for AT&T's stock. And Verizon's dividend growth is hindered by the fact that it has to divide Verizon Wireless's cash flow with 45%-owner Vodafone. Meanwhile, AT&T is supplementing its dividend with share buybacks--something Verizon hasn't done since 2008.
Still, investors tend to prefer reliable, rising dividends to buybacks, which could work in Verizon's favor. And Verizon Wireless has a debt-free balance sheet, which Verizon could lever up, freeing up cash.
Investors looking to ring up yield will find plenty with either company. But Verizon's signal comes through clearer.
-Write to Miriam Gottfried at Miriam.Gottfried@wsj.com