Financial Comparison Of AT&T And Verizon

AT&T is among the largest telecommunications companies in the world headquartered in the United States. The company offers mobile and fixed telecommunication services. The company is also among the highest earners in the media and entertainment industries. The company originated from the Bell Telephone Company, founder Alexander Graham. AT&T Corp. dominated phone services forming a monopoly supported by the government called the Bell System. The company earned its place as the biggest phone company in the world. To regulate the monopoly system, the company was faced with a need to turn its subsidiaries into independent organizations. Among the subsidiaries that broke from AT&T Corp. was Southwestern Bell that acquired numerous telecommunications companies and became known as SBC Communications. This company went on to acquire AT&T Corp. in 2005 and adopted the name of AT&T. 

The company has since then made numerous acquisitions that have contributed to its success. AT&T operates main units that include communications, AT&T Mobility, Advertising and Analytics, and consumer entertainment video services. The company offers wireless telephone services, landline networks, cable networks, also film and television production. The market value of AT&T has undergone significant changes due to restructuring in the organizational structure. The company has undergone numerous mergers and acquisitions that have impacted the market value of its stocks and bonds. In 1987, the stocks underwent a 3-for-1 split, another 2-for-1 split in 1993 and again in 1998. 

Verizon Communications Introduction

Verizon Communications is a telecommunications multinational company located in the United States. The company is headquartered in New York City. The company traces its history to 1984 when regulators broke the Bell System, established by AT&T, and known as a monopoly system for it dominated the telecommunication industry. After the break-up, AT&T split into various companies. Among them was Bell Atlantic that operated from the New Jersey area southwards to Virginia. Bell Atlantic later turned into Verizon. In 1997, Bell Atlantic ventured into New York City by merging with NYNEX. After the merger, the company moved its offices to New York City which was the initial headquarters of NYNEX. In 2000, Bell Atlantic went on to acquire GTE in order to to acquire a wider market and expand its footprint. After this acquisition, the company changed its name to Verizon, as it is known today. 

Verizon operates in the telecommunications industry and is a publicly traded company on the NYSE. The firm deals with cable televisions, digital television networks, mobile phone networks, broadband, and landline networks (Street insider, 2018). The company also offers internet services, IPTV, and telematics. The company appeared at Number 16 on the Fortune 500 list earning a place as the largest corporation in the United States in terms of revenue. Verizon has run some remarkable marketing campaigns including ‘Powerful Answers’, ‘That’s Not Cool’ and ‘Inspire Her Mind’. The campaigns have contributed to the company’s high earnings. The current market price of Verizon shares is $56.32 which has resulted from the continuous restructuring of the company since its formation. The company had revenue of 130.9 billion in 2018, making it one of the highest earners in its industry. 

AT&T Company Recent Merger and Acquisition (M&A) Activities

2018 was a year characterized by significant mergers and acquisitions in the telecommunications industry. Both Verizon and AT&T Company participated in major M&A activities that largely impacted the industry. Mergers and acquisitions affect the value of the business and also affect the market at large. Strategic M&A activities are aimed at expanding the business by strengthening its market share of creating synergy. 

In 2018, the AT&T acquisition of Time Warner was one of the notable M&A activities of the year. The deal had a substantial impact on the telecommunications industry due to the resulting presence of the company after the acquisition. The company dominated the satellite sector after the acquisition. Due to the dominance effect, the acquisition was accompanied by a legal battle as stakeholders within the industry sought to stop the acquisition from taking place. The $85.4 billion gave the company a huge advantage making it the biggest deal in the American media industry. The merger had a positive impact on the revenue of the business by placing the organization in a position to earn more returns. However, AT&T increased the amount of debt on its balance sheet. 

The company made the acquisition when Time Warner’s shares were highly valued. Resultingly, AT&T spent a lot of resources as capital to acquire the business. At the time of the acquisition, the shares had a value of $107.50 per share. Between the announcement of the acquisition and the actual acquisition period, the shares value had risen by about 40%. AT&T accumulated a total of $249 billion in debt from the deal. The debt includes financial obligations that were taken over from Time Warner. As an outcome of the acquisition, AT&T will pay large amounts increasing the number of its expenses. As a result, the value of the company will reduce in the future due to the heavy burden of its acquired expenses. 

Verizon Recent Merger and Acquisition (M&A) Activities

Verizon acquired Straight Path in 2018 for $3.1 billion, a company dealing with wireless networks. Before sealing the deal, Verizon competed with AT&T for the deal through a heated bidding session. The two companies were in battle as they both desired to take over Straight Path Communications. Verizon managed to acquire the company through a stock transaction. In acquiring the company, Verizon has an upper hand in the development of a 5G network. The shares of Straight Path were valued at $184 per share. The price had risen over the 4 years during which time the companies were planning the merger. Paying for the acquisition through stocks led to the saving of expenses. The company saved itself from cash flow problems by choosing this mode of compensation. However, Verizon had an obligation to pay AT&T $38 million as a termination fee on behalf of the acquired company. 

Verizon made huge losses after its acquisition of Yahoo and AOL in 2015. The company spent $4.4 billion in acquiring AOL and $4. 8 billion settled in cash. Verizon combined the two entities after acquiring them to form Oath, an investment that it had to devalue in 2018. The companies made huge losses in acquiring these investments, especially because they were overvalued and could not generate the expected returns for the business. The overall loss from the acquisitions amounted to $4. 6 billion. 

Financial Statements and Common Size Statements

For AT&T, the expenses reduced between 2017 and 2018, while the net income grew from 8.72% to 11.66%. Verizon, on the other hand, experienced an increase in the proportion of expenses over the year. Their net income also grew from 12.52% to 14.72%. 

In AT&T, the current assets decreased over the year while other assets increased. Current liabilities decreased from 18% to 12%. The long-term debt grew by 1% while the stockholders’ equity grew from 32% to 35%. Verizon’s assets remained unchanged over the year as the proportions remained the same. The long-term liabilities increased while the stockholders’ equity increased. 

Debt-to-Equity Ratio

Debt-to-Equity Ratio determines the firm’s capacity to balance financing from debt as well as equity. The equity holders are the real owners of the business while the lenders expect payment for their loans. This ratio identifies whether a company is relying more on debts than equity. The ratio identifies the proportion of debt and equity used in financing the business’s assets (Babalola & Abiola, 2013). The ratio is calculated by dividing total liabilities by shareholder’s equity. 

AT&T had a Debt-to-Equity Ratio of 0.67 in 2017 and 0.63 in 2018. The company has a low ratio indicating that the shareholders finance most of its operations. The ratio also indicates that the company does not spend much of its income in the payment of interest rates when financing debts. The company also has a large potential for growth that can be realized by acquiring more debt to finance operations. Overall, I determined that the company is doing well in maintaining a balance between debt and equity. 

Verizon had a Debt-to-Equity Ratio of 4. 75 in 2017 and 3. 73 in 2018. The firm has a high ratio indicating the high utilization of debt in financing its assets. Therefore, the company spends a lot on financing its debts, which I believe may place the company in jeopardy. The ratio is too high. This may scare away investors since the ratio indicates that the creditors are financing most of its operations. 

Current Ratio

The current ratio measures the liquidity of a business which indicates the organization’s capacity to meet its short term liabilities. The business must be in a position to pay short term debts for its daily operations to continue (Barnes, 2016). Organizations have to pay creditors to receive supplies or pay bills to receive services. This ratio measures the company’s ability to meet these obligations from the available current assets. Calculating the ratio involves dividing the current assets by current liabilities. 

The current ratio was 0.97 in 2017 and 0.81 in 2018 indicating a high rate in both years. From the ratio, it is evident that the corporation has a sound current ratio since its current assets exceed the current liabilities by a large amount. Therefore, the company can easily meet its financial obligations. Lenders would be comfortable dealing with the company since it can easily repay debts. It is in an adventious position to acquire credit due to its creditworthiness. With more access to credit, the company can run its operations and maximize profit in the process. 

Verizon had a current ratio of 0.91 in 2017 and 0.97 in 2018. The high ratio shows that the company has more assets than liabilities. The company can meet its financial obligations with ease due to its high liquidity. Creditors will easily extend credit to the company with confidence that the business can easily repay debts. The corporation’s current assets highly exceed its current liabilities as indicated by the current ratio, meaning that its liquidity is high. 

Return on Equity (ROE)

The return on equity refers to the earnings generated from the amount invested by the shareholders of the firm. It refers to the profitability of a business by indicating the amount generated from the money entrusted to it by shareholders. Shareholders study the ratio to determine the amount that the company can generate from their investments. A high ratio indicates that the shareholders are bound to reap higher benefits from their investment in the company. 

In 2018, AT&T had a return on investment of 0.11 meaning that for every dollar invested, the shareholder would get a return of 11 cents. In 2017, the return amounted to 10 cents for every dollar invested in the business. The change indicates that the return on investment increased over time. A higher return on investment indicates an increase in the profitability of the business.

Verizon had a return on equity of 0.34 in 2018 and 0.35 in 2017 indicating a slight change. In 2018, a shareholder received 34 cents for every dollar invested with the company. The company indicates consistency in its high returns to shareholders. 

Net Profit Margin

This margin shows the ability of a business to translate its sales into profits. The ratio checks on whether the corporation is capable of containing costs to ensure high profitability. A firm with a high net profit margin can minimize operating costs as well as overhead costs (Borhan et al. , 2014). The ratio is useful in comparing the efficiency of companies in the same industry. Assessing the efficiency in the operations of various firms is possible through the use of this ratio. Calculating the ratio involves dividing the net profit by the net sales. 

Verizon had a margin of 0.13 in 2017 and 0.15 in 2018 indicating a high cost efficiency. The company’s efficiency increased in 2018. The firm has a high net margin that reflects its ability to control costs. The 0.13 and 0.15 are high ratios which indicate high performance for the company. 

Overall Analysis of AT&T

AT&T maintains a balance between equity and debt when financing its assets to generate income for the business. Currently, the firm uses more equity and less debt in running the business. However, the company could do better in finding an optimal capital mix by utilizing more debt. In acquiring more debt, the AT&T can enhance its access to more resources to enhance the firm’s operations. The company has a low return on equity, meaning that the it is not maximizing the value of shareholders. The company’s level of efficiency is also low. It properly utilizes available resources to maximize value for shareholders. 

Overall Analysis of Verizon

Verizon highly utilizes debt in financing its assets as evidenced by its high debt-to-equity ratio. The companymaximizes its potential by using debt to acquire resources utilized by the business. The shareholders receive more returns due to access to debt. The company exhibits a high level of efficiency as indicated by the net margin. The company is operating at an optimal state which means that the income exceeds the costs. Verizon has a high level of profitability making it an attractive venture for investors. High profitability means that the shareholders are realizing maximum returns for their investment (Keown, n. d. ). The company realizes high returns on equity meaning that for every dollar invested by a shareholder, the returns are attractive. 

Conclusion

In comparing Verizon and AT&T in terms of debt-to-equity ratio, Verizon has a higher ratio. The high ratio indicates that Verizon utilizes debt better in running its operations. AT&T, on the other hand, relies highly on shareholders’ equity to finance operations. In consideration of this ratio, Verizon has a higher potential for growth due to higher access to resources through borrowing. AT&T's low utilization of debt limits its capacity to grow in the future. 

In 2018, both companies had a similar current ratio of 0.97 which is a high and attractive ratio for investors. From the ratio, it is evident that both companies do not have liquidity problems and are capable of settling their short term liabilities. High liquidity is advantageous for the business since it means that the business can meet short term expenses associated with running operations. 

In comparing the returns from the business, Verizon has a higher rate of return than AT&T. In 2018, AT&T had a return on equity of 0.11 while Verizon’s was 0.34. If an investor was to invest in AT&T, they would receive 11 cents for every dollar invested. If investing in Verizon, the investor would realize 34 cents for every dollar invested. In choosing between the two companies, the investor would choose to invest their money in Verizon since the company promises higher returns. In consideration of the net profit margin, Verizon also promises higher returns than AT&T. In 2018, Verizon’s rate was at 0.15 while AT&T’s was at 0.12. Verizon’s higher rate indicates its efficiency in operating its business. 

References

• Babalola, Y. A. , Abiola, F. R. (2013). Financial Ratio Analysis of Firms: A Tool for Decision Making. International Journal of Management Sciences, Research Academy of Social Sciences, 1(4), p. 132-137. 
• Barnes, P. A. (2016). The Analysis and Use of Financial Ratios: A Review Article. Journal of Business Finance & Accounting, 14(4), p. 449 – 461. 
• Borhan, H. , Naina Mohamed, R. and Azmi, N. (2014). The impact of financial ratios on the financial performance of a chemical company. World Journal of Entrepreneurship, Management, and Sustainable Development, 10(2), pp. 154-160.
• Dalayeen, B. (2017) Financial Performance Appraisal of Selected Companies in Jordan. Open Journal of Business and Management, 5, p. 131-140.
• Dechow, P. M. , Sun, Y. , Wang, A. Y. (2013). The use of financial ratio models to help investors predict and interpret significant corporate events. Australian Journal of Management, 38(3), p. 553–598. 
• Keown, M. &. (n. d. ). Foundations of Finance by. ISBN: 978-0-13-408328-5
• Seeking Alpha (2018). AT&T Inc. (T): FORM 10-Q. Seeking Alpha. Retrieved from https://seekingalpha. com/filing/4222469
• Street Insider (2018). Form 10-Q VERIZON COMMUNICATIONS For Sep 30.Street Insider. Retrieved from https://www. streetinsider. com/SEC+Filings/Form+10-Q+VERIZON+COMMUNICATIONS+For%3A+Sep+30/14759552. html#sD40E57F26CC656ADBCE34156032B0B19