Dialing for Dollars

 | Mar 08, 2012 | 11:30 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

aapl

,

vz

,

t

,

amzn

,

mo

Apple's (AAPL) widely anticipated release of the new iPad did not fail to impress. A high-definition screen, a better camera, a faster 4G wireless connection and a new suite of apps all combine to make the tablet indispensable. So far, Apple's bet on increasing tablet use has been right on the money; during the product launch, Apple CEO Tim Cook noted that Apple sold more iPads in its last quarter than the number of personal computers sold by any manufacturer during the same period.

Apple's stock barely budged on the unveiling of the new iPad, but that should come as no surprise. When the iPhone 4S was released, the market reaction was initially negative. Today, most retailers of the newest iPhone can hardly keep them in stock.

While everyone pays attention to the shares of Apple, investors may want to consider looking closer at Verizon (VZ) and AT&T (T). Every new model of an iPhone or iPad is essentially a product that requires more data usage. I can personally attest to that: My cell phone bill has jumped from $30 a month to over $70 a month in about two years. During that time, I went from a flip phone to a Blackberry to an iPhone. I also own an iPad, and I'm likely to upgrade to the new 4G model. Factor in Android's line of smartphones, Amazon's (AMZN) new Kindle Fire and similar devices, and it's highly likely that we will see a continued increase in network demand.

As data usage increases, so will the average monthly bill. According to data from AT&T, the average revenue per user (ARPU) for a smartphone user is nearly twice the ARPU coming from non-smartphone users. I would say that it's safe to assume that the same relationship applies at Verizon. While owning shares of Apple may offer the most exciting promise of future gains as sales of tablets and smartphones continue to surge, Apple shares could be ripe for some sort of correction. Whether that happens at $540 a share or $700 a share, it will happen.

The incredibly attractive dividend yields from AT&T and Verizon make them extremely defensive stocks to own this environment -- you can pick up a 5% yield (nearly triple the 10-year Treasury) from Verizon; at AT&T, the yield is nearly 6% -- and in this case, the safety created by the dividends also happens to come with a nice pocket of future growth, thanks to increased usage of mobile devices. In most cases today, a high yield is meant to compensate for the lack of future in a business -- for instance, Altria's (MO) 5.5% yield comes against a backdrop of a prolonged trend of declining cigarette use. That is not the case with Verizon or AT&T.

As Apple's performance has shown us, consumers will buy phones and tablets even when the economy is not growing, and that means those consumers are going to view their cellular bill as an important expenditure. The result is stable growing cash flows from these two businesses. Verizon is pulling in about $15 billion a year in free cash flow against a market cap of $110 billion. The company currently lays out $5.6 billion a year in dividends, up from $5.2 billion two years earlier. With such a high cash flow to dividend coverage ratio, the dividend is both secured and likely to keep growing in the years ahead. Consider that AT&T shells out around $10 billion a year in dividends while generating similar cash flows to Verizon, and it becomes likely that there is room for future dividend raises at Verizon.

In short, Verizon and AT&T are extremely defensive stocks in today's market. And while a high dividend yield usually confers a sign of muted growth, I think these names will experience decent enough growth over the next couple of years to produce a 5% to 7% annual increase in their share prices. Add in the yield, and the sum total is a very attractive total return for a defensive company, even more attractive behind the current backdrop of macroeconomic risks facing the world today.

Columnist Conversations

TrueCar, Inc. (TrueCar) is a data-driven online platform operating a technology infrastructure, powered by dat...
Financial Planning magazine reports that... The Internal Revenue Service is considering regulations to limit t...
MMM is rolling over. Early last week the stock began to fall out of a steep bull channel before retestin...
Higher tariffs are a sign of increased floating inventories that will be available for immediate withdrawal on...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.