AT&T (T) and Verizon (VZ) are the two biggest telecommunications companies in the United States. 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 leader. After restructuring, the company operates in three business units: Mobility, Business Wireline, Consumer Wireline, and Latin America. The telecommunications giant has about 69.0 million postpaid mobile subscribers and 6.9 million fiber connections.
In a two-part restructuring, AT&T divested DirecTV by selling a 30% stake to TPG Capital and retaining 70% ownership.
Next, AT&T divested Warner Media and combined it with Discovery to create a new global entertainment company called Warner Bros. Discovery (WBD). Under the terms of the completed transaction, AT&T received $43 billion in a combination of cash, securities, and retention of debt.
In addition, AT&T shareholders received stock representing 71% of the new company, while Discovery shareholders received the remaining 29%. The new company combines multiple brands and content, bringing together HBO, Warner Bros., Discovery, CNN, DC Entertainment, HGTV, Food Network, Cartoon Network, New Line Cinema, Castle Rock Entertainment, TLC, Animal Planet, MLB Network, Eurosport, Food Network, TNT, TBS, and more.
In the third quarter of 2022, AT&T reported a 3.1% increase in revenue over last year’s quarter because of higher Mobility and Consumer Wireline sales offset by lower Business Wireline sales. The company added 708k postpaid phone net adds, 108k prepaid net adds, and 338k fiber net adds in the quarter. In addition, adjusted earnings per share rose from $0.62 to $0.68.
Verizon was created by the merger of Bell Atlantic with GTE in 2000. The firm also acquired MCI Worldcom, Alltel, and smaller companies. Most recently, it acquired TracFone, adding ~20 million prepaid customers. Verizon is one of the largest wireless carriers in the country. Wireless generates approximately three-quarters of total revenues, while broadband and wireline services account for about a quarter of sales. The company’s network covers about 300 million people and 98% of the U.S. Verizon has also launched 5G Ultra-Wideband and is rapidly growing the service. Today, the company has about 120 million wireless, 6.7 million FiOS, and 25 million fixed-line telecom connections.
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 long-term 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 grew revenue by 4.0% in Q3 2022, but its earnings per share declined (-7%) over last year’s quarter. Verizon added 377k net adds for broadband, and 61k FiOS net adds, but only 8k postpaid wireless net adds. The market has responded unfavorably to weak wireless growth.
Overall, the two telecommunications giants are in different phases right now. AT&T is coming off 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. That said, Verizon is struggling with growth in wireless.
Growth Prospects of AT&T vs. Verizon
AT&T is a colossal business that generates more than $20 billion in profits yearly. However, it has grown its earnings per share by only 1% per year 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 divested 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 company’s performance record.
On the bright side, AT&T is now leaner and more focused on wireless and fiber. 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 total debt peaked at $209 billion, nearly the same as the stock’s market cap. This fact explains why annual interest expense has essentially doubled in the last seven years to $8.4 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. As a result, the company expects to reduce its leverage ratio (net debt-to-EBITDA) from 3.2X to less than 2.5X by the end of 2023. This process will reduce interest expenses and boost the company’s earnings per share. 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.
In comparing AT&T vs. Verizon stock, Verizon has a lower debt load than AT&T and has exhibited a much better past performance record, partly thanks to its less complicated, more focused strategy. To be sure, according to Portfolio Insight*, Verizon has grown its earnings per share at a 9.63% average annual rate over the last decade. However, recent spending on more wireless spectrum has increased net debt to ~$176B.
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.
From the perspective of dividend growth, AT&T was the better stock vs. Verizon in the past. It had 36 years of dividend growth, making AT&T a Dividend Aristocrat. On the other hand, Verizon has raised its dividend for 18 consecutive years, making it a Dividend Contender.
However, AT&T paid the same dividend for eight consecutive quarters from 2020 to 2021, and thus the streak ended. Moreover, AT&T reduced the dividend to $1.15 instead of $2.08 per share due to its smaller size. Nevertheless, given the healthy forward payout ratio of ~47%, investors should rest assured that the new dividend of AT&T should be safe. The stock now offers a 6.0% dividend yield, off the ~7.5% peak in mid-October 2022.
Verizon is currently offering a 6.94% dividend yield off its recent high. The yield is nearly the highest in a decade. Moreover, as it has a solid dividend payout ratio of 47% and a manageable debt load, its dividend is safe, particularly given the company’s resilience to recessions. On the other hand, Verizon has grown its dividend by only 2.0% per year on average over the last decade. Therefore, investors should not expect significant dividend raises going forward.
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Final Thoughts on AT&T vs. Verizon Stock
Comparing AT&T vs. Verizon stock, Verizon has underperformed the broader market dramatically this year, down (-26.5%) on weak subscriber growth. AT&T is down (-1.90%) for the year. That said, both stocks are attractive for income-oriented investors seeking excellent yields with acceptable dividend safety.
In the past, Verizon was more focused and seemingly less risky because of AT&T’s acquisitions and debt. However, both are more similar now in business strategy. Moreover, the earnings multiples are similar because of the bear market, with both trading at a P/E ratio of 7.0X to 7.5X.
Overall, both stocks will likely reward those who purchase them at their current prices, considering the combination of dividend yield and valuation.
Disclosure: Members of the Sure Dividend team are long T and VZ.
You can also read Coca-Cola (KO) vs. Pepsi (PEP): Dividend Aristocrat Matchup by the same author.
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Ben Reynolds founded Sure Dividend in 2014. Reynolds has long held a passion for business in general and investing in particular. He graduated Summa Cum Laude with a bachelor’s degree in Finance and a minor in Chinese studies from The University of Houston. In his spare time, Reynolds enjoys watching movies, reading, exercising, and relaxing with his wife, author Shina Reynolds.