AT&T (T) and Verizon (VZ) are the two biggest telecommunications companies in the U.S. They have always enjoyed a dominant position in their business, and thus they have generated excessive free cash flows. As a result, these two telecommunications stocks have always offered generous dividends, and hence they are great candidates for the portfolios of income-oriented investors. In this article, we will compare the prospects of these two telecommunications giants in a head-to-head matchup of AT&T vs Verizon stock.
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Business Overview of AT&T vs Verizon
AT&T is a diversified, global leader in telecommunications, media, and entertainment, operating in three business units: AT&T Communications (providing mobile, broadband, and video), WarnerMedia (including Turner, HBO, Warner Bros., and Xandr), and AT&T Latin America.
AT&T has agreed to combine WarnerMedia with Discovery to create a new global entertainment company. Under the terms of the transaction, AT&T will receive $43 billion in a combination of cash, securities, and retention of debt.
In addition, AT&T shareholders will receive stock representing 71% of the new company, while Discovery shareholders will receive the remaining 29%. The company will combine HBO Max and Discovery+ to compete in the direct-to-consumer business, bringing together HBO, Warner Bros., Discovery, CNN, HGTV, Food Network, TNT, and TBS.
In the third quarter, AT&T incurred a 6% decrease in its revenue over last year’s quarter, primarily due to the separation of the U.S. video business. However, the company posted its best postpaid phone net add quarter in the last decade while its HBO Max global subscribers neared 70 million. In addition, given lower depreciation amounts amid lower investments, the company grew its adjusted earnings per share from $0.76 to $0.87.
Verizon was created by the merger of Bell Atlantic with GTE in 2000. Verizon is one of the largest wireless carriers in the country. Wireless generates three-quarters of total revenues while broadband and cable services account for about a quarter of sales. The company’s network covers approximately 300 million people, and 98% of the U.S. Verizon has also launched 5G Ultra-Wideband in several cities.
A key competitive advantage of Verizon is its reputation as the best wireless carrier in the U.S. This perception is clearly reflected in the wireless net additions of the company and its exceptionally low churn rate. This reliable service allows Verizon to maintain its customer base and move some customers to higher-priced plans.
Verizon has proved more resilient than AT&T to the pandemic. While the latter incurred an 11% decrease in its earnings per share last year, Verizon grew its earnings per share by 2% last year to a new all-time high. Even better, thanks to its strong business momentum, it is on track to grow its earnings per share by another 10% this year.
Verizon grew revenue by 4% in the third quarter and its earnings per share 13% over last year’s quarter. Overall, the two telecommunications giants are in different phases right now. AT&T is in the middle of a significant transformation, aiming to leave the failed investments of the past behind and focus on its most promising businesses. Verizon is in a different position, as it enjoys stronger business momentum, with a less complicated business model than AT&T.
Growth Prospects of AT&T vs Verizon
AT&T is a colossal business, which generates more than $20 billion of profits every year. However, it has grown its earnings per share by only 1% per year on average since 2007. The primary reason behind the daunting growth record is a series of poor investing decisions. For example, AT&T acquired DirecTV for $65 billion in 2015, close to the peak of its business.
After losing about 10 million subscribers, AT&T recently span off DirecTV, with an implied enterprise value of only $16.25 billion. A similar situation was evidenced with Time Warner, which AT&T acquired in 2018 but decided to spin off this year. The investment seesaws of AT&T have certainly taken their toll on the performance record of the company.
On the bright side, when the transaction mentioned above with WarnerMedia materializes, AT&T will become a leaner company, more focused on its strong divisions. Moreover, a significant growth driver will be the reduction of debt. Due to the enormous acquisitions of the past, AT&T has accumulated an excessive debt load. Its net debt currently stands at $324 billion, which is nearly double the stock’s market cap. This fact helps explain why annual interest expense has essentially doubled in the last seven years, from $3.5 billion to $7.1 billion.
However, AT&T has clearly stated that it will use its excessive free cash flows to reduce its debt load in the upcoming years. The company expects to reduce its leverage (net debt to EBITDA) from 3.2 to less than 2.5 by the end of 2023. As this process will reduce interest expense, it will boost the earnings per share of the company. AT&T has stated that it expects the new company to grow its revenues at a low single-digit rate and its earnings per share at a mid-single-digit rate.
The screenshot below is from Stock Rover*.
Verizon has a lower debt load than AT&T and has exhibited a much better performance record, partly thanks to its less complicated, more focused strategy. To be sure, Verizon has grown its earnings per share at an 8.6% average annual rate over the last decade.
Nevertheless, as the whole telecommunications industry in the U.S. is expected to grow by only 0.5% per year, it is prudent to be somewhat conservative in future growth expectations. Thus, overall, Verizon can be reasonably expected to grow its earnings per share by about 4% per year on average in the upcoming years.
The screenshot below is from Stock Rover*.
AT&T has raised its dividend for 36 consecutive years, and hence it has been a Dividend Aristocrat for more than a decade. Moreover, its dividend growth record is superior to Verizon’s, which has raised its dividend for 17 consecutive years making Verizon a Dividend Contender.
However, AT&T has now paid the same dividend for eight consecutive quarters, and thus it has put an end to its growth streak. Moreover, AT&T has stated that the new company will be offering a reduced dividend of $1.15 instead of $2.08 due to its smaller size. Nevertheless, given the healthy current payout ratio of 64% and the resizing of the dividend, investors should rest assured that the new dividend of AT&T will be safe. The stock is now offering an 8.3% dividend yield as seen in the chart from Portfolio Insight*, but the dividend yield is likely to somewhat decrease after completing the transformative transaction and AT&T’s dividend cut.
Verizon is currently offering a 4.9% dividend yield as seen in the chart from Portfolio Insight*. As it has a solid payout ratio of 48% and a manageable debt load, Verizon’s dividend is safe, particularly given the company’s resilience to recessions. On the other hand, Verizon has grown its dividend by only 2.5% per year on average over the last decade. Therefore, investors should not expect great dividend raises going forward.
Final Thoughts on AT&T vs Verizon Stock
Verizon and AT&T have both underperformed the broad market dramatically this year, as investors have favored high-growth stocks more than slow-growth stocks. As a result, both stocks have become attractive for income-oriented investors, particularly given the scarcity of attractive yields in this fully valued market.
Verizon has decent growth prospects and is offering a 4.9% dividend yield, which has a wide margin of safety. AT&T has hurt its shareholders with its poor investment decisions in the last six years, but the worse seems to be behind the company. As the market has punished the stock severely, AT&T appears to be undervalued right now.
Overall, both stocks are likely to highly reward those who purchase them at their current prices, with Verizon probably more suitable to risk-averse investors.
Thanks for reading AT&T vs Verizon Stock: Telecom Matchup!
Disclosure: Members of the Sure Dividend team are long T and VZ.
Author Bio: This article was written by the Sure Dividend team.
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