Better Buy: Verizon Communications Inc. vs. Sprint
Image from Sprint commercial featuring a former Verizon pitchman. Image source: Sprint.
A few months ago,Sprint (NYSE: S) launched a new television ad campaign starring the "Can you hear me now?" guy from Verizon's (NYSE: VZ)decade-ago campaign. Sprint's pitch to consumers is that you can get a network with nearly the same reliability as the industry leader, Verizon, but at half the price.
But investors have much more to consider than network reliability. Let's take a closer look at these two companies and their stocks to determine which is a better buy.
A pure play in wireless versus a diversified telecom
Sprint used to be a long-distance phone call provider, but it exited that business in 2006. Now, nearly all of its revenue comes from its wireless operations. The company also operates a small broadband internet business for government agencies and corporations.
After several years of losing postpaid phone subscribers -- some of the most valuable service subscribers in the industry -- Sprint is finally starting to grow its user base again. In fiscal 2015, it added 438,000 postpaid phone subscribers and more than 1.2 million total postpaid subscribers across all device types. In fact, Sprint's fiscal fourth quarter was the first time the company postpaid phone net additions were more than Verizon's.
About 77% of Sprint's wireless service revenue is derived from its postpaid customers. Around 20% comes from prepaid customers who pay for service up front instead of getting billed, and the last 3% is from wholesaling access to its network through mobile virtual network operators.
Verizon's business is a bit more complicated. Not only does it run a wireless network, but it also has a home phone, internet, and television service in select markets and offer IT and data services to large businesses. It recently started expanding into digital media with several large acquisitions, and generates a meaningful amount of revenue from digital advertising.
Verizon's wireless business remains healthy considering the competitive environment it faces. The company consistently adds subscribers to its largely postpaid customer base (about 95% of connections). Over the past 12 months, it's added over 4 million postpaid connections-- nearly 1 million of them phone connections.
Meanwhile, Verizon is slowing its investment in its wireline business as it turns its focus to digital media. It sold off some of its wireline assets, and capital expenditures for the segment declined 11% in the trailing 12 months. As a result, Verizon counts fewer customers for all of its home services.
A look at valuation
Sprint doesn't produce a net profit, so comparing it with Verizon based on earnings is of no use. Additionally, the massive wireless networks each of them operates would distort earnings results due to depreciation. On an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis, Sprint and Verizon are neck and neck. Each sports an enterprise value-to-EBITDA ratio of about 6.75.
Analysts expect each company to grow sales and earnings modestly between 3% and 5% per year over the next five years, so there's no clear winner when it comes to valuation based on EBITDA.
One factor that benefits Verizon, however, is its strong dividend, which currently yields about 4.4% on the stock price. Sprint, on the other hand, suspended its stock dividend in 2008. What's more, Verizon's dividend is relatively safe, with a payout ratio at 59% of analysts' expected 2016 earnings, and management has increased the payment for 10 straight years.
Verizon is adding more customers to its wireless business, narrowing the focus of its wireline business, investing heavily in the growing digital advertising space, and pays a very good dividend with the potential to grow. All of those reasons make it a better buy than Sprint stock right now.
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Adam Levy owns shares of Verizon Communications. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.