The subsidy from carriers helped make the iPhone what it is, because shelling out $600-$800 is not really something for the masses. Sprint spent $1.5 billion in the first quarter alone on wireless subsidies. This is considered low due to a seasonally lower upgrade rate. Management expects particularly heavy upgrade volume in the coming months. The expense tells me that the subsidies have got to go.
Sprint is in a solid position and I do not think this turnaround is a problem. I am eager to see profitability and growth for Sprint once the heavy capital spending goes down. The stock is already up from the $2 range, and I still like Sprint at $7. First, Sprint uses its profits to reduce its debt, which is quite high with the debt-to-equity ratio at 3.4. Then, it should use profits to buyback its shares if some of its debt is convertible and increases the share count. Only then can it think about offering a large dividend.
The rest
Hate to lump together the titans, but I prefer the turnaround story. If you must choose a big safe company, then go with Verizon Communications Inc. (NYSE:VZ). The company is the leader in LTE coverage, which becomes important when you look at it in light of AT&T Inc. (NYSE:T)‘s announcement that capital expenditures will stay flat in 2014 and 2015 at a lower value. Verizon is expecting its capital expenditures to fall compared to revenue, though that could mean a lot of things. Verizon, being the leader, can afford to keep capital expenditure flat, but I will be looking to see if AT&T Inc. (NYSE:T) is falling further behind.
Verizon’s size makes it a fairly standard investment. Revenue has been growing consistently over the last two years, though earnings tend to be a bit more erratic. It has almost a 4% dividend yield, and less than half of Sprint’s debt-to-equity ratio. Verizon is something you can hold onto and not worry too much. Despite its massive size, it is still adding subscribers.
AT&T reported revenue lower than expectations and the revenue ttm measure dipped slightly. That probably spooked this touchy market, and I think even matching expectations counts as an earnings disappointment nowadays. The revenue hit was not as bad as it might appear, at least not yet. If it becomes a trend then you can revisit the issue, but if you look at quarterly revenue measures, you see fluctuations occur often, but rarely do the swings change the direction of the ttm measure.
The company did add subscribers, and acknowledges that it needs to find new ways to make money off customers as mostly everyone has a smartphone now. I just hope the growth method does not become more nickel and dime, but actual value added.
AT&T might actually be good to pick up on an overdone decline on slightly lower revenue even though the subscriber base increased. I would say $35 is a buy. AT&T has the highest dividend yield at 4.60% at current levels and the lowest debt-to-equity ratio that is below 1. Despite the headwinds, it remains a strong company.
Conclusion
Right now, I am fairly worn out of the market. It could be heading for a cooling off period, and I would pick either Verizon or AT&T as a solid dividend stock. AT&T has the higher yield, and I do not see it headed into the abyss at any time, but my price of $35 stands so I would wait for that. Sprint is an options play for me. I do not think there is a true downside risk, so even if the DISH deal does not happen, I would buy into any weakness with calls.
Sprint does need Softbank and Clearwire so those pose the largest risks for the company, but I am optimistic about it. I do not have a target for Sprint, but good news and earnings can send it up further. I might consider 2015 calls if the price is right.
The article Sprint Looks Good Despite Being in the Hotseat originally appeared on Fool.com.
Nihar Patel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nihar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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