Better Buy: Verizon Communications Inc. vs. T-Mobile US Inc

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Back in 2011, T-Mobile (TMUS -0.02%) seemed like a fading player in the wireless subscription business. The duopoly of Verizon (VZ -0.85%) and AT&T (T -0.92%) owned 65% of the market, while T-Mobile came in a distant fourth place, with just 11% of the market. 

Times, however, have changed. Revitalized by CEO John Legere's "Uncarrier" plan that has expanded to include a wide number of initiatives, the company has grown to capture almost 17% of the market. While Verizon remains the top dog, with 35% of wireless subscriptions nationwide, such a drastic improvement leads to a simple question: Is T-Mobile's stock a better buy at today's prices?

There's no definitive way to answer that, but there are three different lenses through which we can answer the question.

Financial fortitude

Cash in the bank is awfully boring. But it's incredibly important. That's because every business -- at some point in time -- will run into rough patches. Whether they be company-specific or macro in nature, those with lots of cash on hand will be rewarded with optionality.

What do I mean by this? Companies with cash will be able to continue their operations -- and have the option to outspend rivals with less cash, buy back stock, keep paying a dividend, or even make a splashy acquisition.

Those with lots of debt, on the other hand, won't be so lucky. They will have to narrow their focus to just making ends meet to stay out of bankruptcy.

The telecom industry requires heavy debt levels to maintain the enormous infrastructure required to meet our data demands, but we can still investigate where breathing room may exist. Here's how Verizon and T-Mobile stack up in terms of financial fortitude.

Data source: Yahoo! Finance. Cash includes long and short-term investments. Net income and free cash flow presented on trailing-12-month basis.

It's important to point out that Verizon is valued at roughly four-and-a-half times the size of T-Mobile. Given that, I can't help but give the nod here to T-Mobile. In terms of a cash-to-debt position, T-Mobile clearly has the upper hand -- with a somewhat comparable level of cash but only one-fifth the debt level.

Of course, much of the debt that Verizon has is because the company bought out the stake that Vodafone (NASDAQ: VOD) had in Verizon Wireless -- a critically important piece of Verizon's overall empire. But we'll get to the benefits that this bestows on shareholders in the next section.

Winner = T-Mobile

Sustainable competitive advantages

Often referred to as a "moat" in investing circles, a company's sustainable competitive advantages are perhaps the most important metric for any investor to consider. Evaluating a moat is part art, part science. In essence, the moat is the special sauce that makes a company what it is -- and differentiates it from all of the other players in the industry.

Both T-Mobile and Verizon are beneficiaries of high barriers to entrance. In short, we don't see a lot of start-ups popping up to vie for your mobile subscription dollars. That's because it's prohibitively expensive to build out data networks.

Verizon's moat is provided by the company's top spot within the industry. With 35% of all wireless subscriptions, and a fairly low churn rate, the company is able to rake in tons of free cash flow every month. It has also expanded beyond wireless service to become an Internet provider (FiOS), and it owns AOL's properties -- and will soon own Yahoo!'s operating business. It's yet to be seen exactly how these acquisitions will play out.

T-Mobile, on the other hand, has the advantage of being a first-mover in the no-contract plans among the country's biggest players. Legere, in effect, is doubling down on convenience and customer service, saying, "We're so much better than the others, we'll give our customers the choice to leave, and they still won't."

Of course, Legere has come up with other ways to keep customers around -- equipment installment plans or promotions tied to monthly bill credits -- but the bottom line is that the strategy has served as an important differentiator. 

The strategy has paid off thus far, but it's worth stating that Verizon and AT&T have already started offering much the same deal, and it may erode T-Mobile's advantage over time. 

In addition, we are already seeing Verizon move beyond simply being a wireless carrier and into a fully fledged media and content company -- via the aforementioned Yahoo and AOL tie-ups. That's something that T-Mobile simply can't compete with at this point -- from a cash, cash flow, or acquisition standpoint.

Winner = Verizon

Valuation

Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Data source: Yahoo! Finance, E*Trade, Morningstar. P/E represents figures from non-GAAP earnings.

Here's where things get a little confusing. Verizon appears to be considerably cheaper on both an earnings and free-cash-flow basis. However, when we consult the PEG ratio -- which factors in the potential for future growth -- T-Mobile appears to be 80% cheaper!

Normally, that would make me give the nod to T-Mobile. However, there's one extra variable to consider: the dividend. Verizon has a healthy and sustainable 4.5% yield, while T-Mobile has none to speak of. Given that, I'm siding with Verizon, here.

Winner = Verizon

Final call: Verizon

So, there you have it. If I had to boil this down to one sentence, it would be this: T-Mobile has better growth prospects, but Verizon is the safer bet and offers a dividend. Truth be told, both are probably worthy of your consideration, but for those seeking income via dividends, Verizon is the obvious choice.