Better Buy: AT&T or Verizon?

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Telecom's twin titans -- AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) -- both reported earnings last week. Neither report was well-received. AT&T fell after reporting a sharp slowdown in signing net new customers. Verizon slipped after reporting earnings that were about in line with expectations.

Big Red booked $0.51 in per-share earnings on $26.99 billion in revenue. Post-paid net more than doubled to 906,000 and Verizon now claims 104 million wireless connections, including 88.4 million retail customers. AT&T ended Q1 with 97.5 wireless subscribers.

And yet, looking back, it seems neither company has won the hearts of buyers of Apple's (Nasdaq: AAPL  ) iconic iPhone. Both carriers sold millions more handsets to iAddicts in the first quarter, leaving those betting on a reversal of fortune disappointed.

So if these two are more evenly matched than pundits had suspected, the question now is which one is the better buy for long-term investors? Let's dig into the numbers:

Metric*

AT&T^

Verizon^

CAPS stars (out of 5) ** ****
Revenue growth 1.5% (1.4%)
Normalized net income growth (10.1%) (2%)
Gross margin 57.4% 60%
Return on capital 6.9% 7.8%
Levered free cash flow $8,736 $12,570
Dividend yield 5.60% 5.30%
Forward P/E 13.00 16.63
PEG ratio 2.80 1.73

Source: Capital IQ, a division of Standard & Poor's.
*All metrics calculated over the trailing 12 months.
^Except for percentages, all numbers in millions.

Three things stand out it this table:

  1. Both companies produce extraordinary cash flows after accounting for debt, interest, and working capital needs.
  2. Both pay dividends that yield well above the market average. Meaty dividends tend to pay off well for investors.
  3. But in terms of relative valuation, analysts expect Verizon to grow profits more than twice as fast as AT&T (excluding the effects of its planned T-Mobile merger) and Sprint Nextel (NYSE: S  ) over the next five years.

If you believe Wall Street is right, then Verizon is the no-brainer buy among these three. But are analysts' estimates trustworthy? I'm asking you. Please vote in the poll below and then leave a comment to let us know which telecom stock you'd buy.

You can also rate AT&T and Verizon in Motley Fool CAPS and keep tabs on the company by adding both stocks to your watchlist for free, personalized stock tracking.

AT&T is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended members create a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Apple and is also on Twitter as @TheMotleyFool. Its disclosure policy is a screaming bargain.


Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 25, 2011, at 7:37 PM, conradsands wrote:

    AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon (the 10th leading U.S. lobbyist) and AT&T (the 12th leading U.S. lobbyist) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer.

  • Report this Comment On April 25, 2011, at 7:43 PM, energysystems wrote:

    My pick-Vodafone. You get a 45% stake of Verizon's healthiest business(wireless), without the baggage of the rest of their conglomerate. You also get the 2nd largest telco in India, a huge imprint in the Euro market, as well as VOD being the largest mobile telco(based on revenues), along with having well over 300 million subscribers. They have in-roads into all the worlds hotbeds for growth. All trading at a P/E discount to either T or VZ. Hefty dividend, with a low payout ratio, with real avenues to pursue growth on a global scale.

  • Report this Comment On April 25, 2011, at 8:57 PM, almypal2012 wrote:

    AT&T is a much better buy... Verizon is not a good buy at all, because Verzon does not owe Verzon wireless completely. They only own 55% and the other half is owned by a European company. AT&T is an All American Company wholly owned by AT&T. The dividends are much better than Verizon.

    Verizon can't even pay their bills. They haven't been able to pay their partner Vodafone a dividend since 2005! Still, they are still being investigated by the FCC to frauduelently billing its customers bogus data charges. I don't wanna invest my money in a company like that!

  • Report this Comment On April 25, 2011, at 9:46 PM, DividendDude wrote:

    I prefer to hold primary positions in the Ma Bell of Canada (BCE) and Alaska Comm. (ALSK) with secondary positions in AT&T and Verizon. The dividends are my primary concern.

  • Report this Comment On April 26, 2011, at 7:46 AM, energysystems wrote:

    almy-There was an agreement in place between VOD and VZ that no dividend would be paid until the debt of the wireless division was paid down, which will happen(in total) this year. That's why VOD hasn't recieved annual divi's from Verizon Wireless. If/When that changes, it should become very interesting for VOD shareholders.

  • Report this Comment On April 27, 2011, at 12:37 PM, yr613 wrote:

    Verizon all the way. I tried both Veri and T personally. T was terrible even in the city. Verizon has not lost a call in 2 yrs.

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