Why Cogent Communications is likely to outperform AT&T (CCOI). | Panda Anku


In the telecom space, there’s no stock more popular than AT&T (NYSE:T). This is mainly due to the fact that it is a well-known name with a large market share throughout the world telecommunications industry and has been a reliable dividend grower for many years, which also produced a high current yield. As a result, it has been a popular and effective retirement replacement stock for retirees. Over the past decade, however, management has developed a track record of destroying shareholder value, leading it to recently cut its dividend. As a result, many retirees have decided they can no longer rely on it to reliably grow its hefty dividend and is therefore no longer their income stock of choice.

Total return price of the T-Share
T Total Return Price data from YCharts

There’s now a much smaller and lesser-known telecom stock called Cogent Communications (NASDAQ:CCOI), which we like a lot more at High Yield Investor. It has generated strong long-term returns for shareholders while aggressively increasing its dividend over the period.

CCOI Total Return Price
CCOI total return price data from YCharts

While CCOI has significantly detracted from T’s performance in terms of both total return and dividend per share growth, both stocks have delivered poor returns over the trailing 12 months:

CCOI vs. AT&T Stock Return Price
CCOI total return price data from YCharts

In this article, we’ll lay out why we think CCOI is the more attractive telecom investment right now.

#1. Cogent Communications has much stronger growth potential than AT&T

The first reason we think Cogent Communications will outperform AT&T going forward is that its business model lends itself to much greater growth than AT&T’s. For example, over the past five years, Cogent Communications has grown its revenue by CAGR 5.7% and its EBITDA by CAGR 8.6%. As a result, the dividend per share has increased by a CAGR of 16% over the period.

In contrast, AT&T has grown its revenue by a CAGR of 0.6% over the past five years and its EBITDA has actually declined by a CAGR of 0.4% over the period. Meanwhile, the dividend increased by just a 1.5% CAGR over that period before being cut this year.

While Cogent’s growth rate appears to be slowing, we expect its growth rate to continue well above AT&T’s. Over the next four years, analysts are forecasting that Cogent will grow its revenue by 6.3% annually and its dividend by 9.6% annually. By contrast, analysts believe that AT&T will only achieve a 0.3% annual revenue growth rate and that its dividend will grow at just a 0.4% annual rate through 2026. The impact of such consistently high differentials in compound interest is irrefutable.

#2. More attractive relative valuation

Cogent’s superior growth profile becomes even more compelling when you consider valuation factors for both companies. Cogent’s expected dividend yield is 6.6%, while AT&T’s is 6.2%. Based on 2026 consensus analyst estimates, Cogent will yield 9.3% of current costs, while AT&T will yield 6.3% of current costs. Given that Cogent’s five-year average dividend yield is 4.6% and AT&T’s five-year average dividend yield is 6.6%, it appears that Cogent has significantly superior upside potential relative to AT&T over the coming years .

Another valuation metric we can look at is enterprise value to EBITDA. Cogent currently trades at 15 times its EBITDA, a significant discount to its five-year average of 16.15. In contrast, AT&T traded at 7.3 times its EBITDA, which is roughly in line with its five-year average of 7.26 times its EBITDA.

Based on these metrics and their starkly contrasting growth track record and growth outlook, Cogent appears to be a reasonably priced growth investment, while AT&T appears to be a fairly valued, very slow-growing leg.

#3. Far superior management

Last but not least, we have a lot more confidence placing our bets with Cogent’s management than we do with AT&T. That’s primarily because of its respective track records, which have shown Cogent to have beaten the S&P 500 in terms of total returns while delivering phenomenal dividend growth. This reflects both a competent and shareholder-friendly management approach. Additionally, we know from speaking with the company that they run a very lean operation and are intensely focused on what they do and on maximizing their ability to continue growing their dividend. In a conversation with their CFO, we were told:

We are highly focused. We have a business. Basically, what we do is we sell two-way internet services. We’re doing it, and we’re doing it exceptionally well…we’ve reduced our cost of goods sold per bit by over 22% per year for the past five fiscal years. We are a company looking to increase margins, reduce costs and gain market share by offering more value and lower prices.

Also, our commitment to not only paying a sizable dividend, but to continually increase that dividend each quarter really forces us to have real discipline. Right? You can’t just increase that dividend every year. The power of this compound dividend compels us to remain focused on cutting costs and improving efficiencies. Nobody has a secretary at Cogent. My CEO flies to Singapore by bus. It’s not a frivolous company that makes stupid acquisitions or things that don’t make sense. It’s a well run business and it’s also a pretty simple story. I was a banker for a long time. I’ve met with a lot of companies and to be honest it’s an incredibly well run company. The interests of the shareholders and the management team are very well aligned. The largest single shareholder is the founder and CEO, and our compensation is almost entirely in stock. So we have a vested interest in making sure the stock performs and the dividend gets paid, which is really important.

In contrast, AT&T management has repeatedly failed to deliver. Between overpriced and over-leveraged acquisitions that led to massive write-downs and impairments of the company, a drastic dividend cut and ultimately a significant underperformance of total returns. Even after streamlining the business and de-leveraging the balance sheet through its recent media business spin-off, T’s business is still capital intensive, growing very slowly, and remains much more complex and cumbersome than CCOI’s business. Without a clear vision or management credibility, and with a track record that warrants anything but trust, there is little to nothing compelling us to place our trust in T’s management now.

Investor Takeaway

Both T and CCOI offer attractive current dividend yields and, on the surface, appear attractively valued after the stock price’s poor performance over the past year. However, in our view, T is not cheap, lacks compelling growth potential, and has underperforming and untrustworthy management. In contrast, CCOI looks discounted by multiple metrics, is expected to regain its strong growth momentum in the coming years, and its management is proven and fully shareholder-centric.

So it’s a clear choice for us. CCOI is our top pick in the telecom space and we rate it as a Strong Buy. T, on the other hand, is a hold from our point of view.

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