Life would be simple for AT&T (NYSE:T) investors if Verizon (NYSE:VZ) didn't exist. For years, the two companies have gone head-to-head over landline and wireless customers. Now that Verizon wholly owns Verizon Wireless, the competition is sure to be even fiercer. But, the good news for AT&T is the company is improving. The bad news, however, is Verizon may still be the better option.

The wireless race
In the battle for wireless supremacy, AT&T always seems to be playing second fiddle to Verizon. In the current quarter, AT&T managed to match Verizon in a few ways, but Big Red still holds the lead.

For instance, though AT&T and Verizon both witnessed 7% annual revenue growth in the past quarter, Verizon has over 97 million postpaid connections, whereas AT&T has about 73 million. All things being equal, most investors would probably want to own the company with the larger base that's growing just as fast as the company with a smaller base.

Additionally, both AT&T and Verizon saw postpaid churn come in at just over 1%. However, with 24 million more connections, this number means more for Verizon. Unfortunately for AT&T investors, that is where the similarities end.

Regarding increased spending from existing postpaid subscribers, AT&T said its average revenue per user, or ARPU, increased just 0.4%, whereas Verizon's average revenue per account, or ARPA, increased by more than 6%. In addition, when it comes to wireless operating margin, Verizon's 35% is superior to AT&T at 28%.

As you can see, AT&T is making strides, and its wireless business is doing well, but Verizon appears to be doing somewhat better.

The state of the wired business
Considering AT&T's wireline business compared to peers Verizon and Frontier Communications (NASDAQ:FTR), AT&T is doing well, but others are doing better. It would seem that AT&T and Verizon's 0.4% annual decline in revenue is much better than Frontier's 4% drop. However, looking beyond the headline numbers, AT&T isn't as effectively attracting customers to some of its businesses, unlike its peers.


High-Speed Internet Net Additions

Video Net Additions

Voice Line Net Losses













Source: SEC Filings – all numbers presented as annual growth or decline

AT&T only led peers in percentage of video net additions on a year-over-year basis. In the other categories, AT&T either lagged its peers in its net additions (Internet), or led its peers in losses (voice). The point is, AT&T's landline business isn't the strongest of the pack, and -- again -- Verizon looks a bit better.

The all-important number
Of course, some investors might not care if AT&T is the cream of the crop, as long as the dividends keep rolling in. However, this is another situation where AT&T's performance leaves something to be desired.

Looking at AT&T's core free cash flow over the last three months, the company generated about $2.6 billion. However, during this same time frame, AT&T paid about $2.4 billion in dividends. With a core free cash flow payout ratio of over 90%, AT&T's dividend looks less than safe.

By comparison, Frontier's yield is more than a percentage point higher than AT&T's, yet the company's core payout ratio sits at just 54%. For investors looking for more safety, Verizon's payout ratio of 25% is the lowest of this group.

The bottom line is, AT&T is doing OK, and in some respects has improved its operations. The big problem is, Verizon is doing better by several measures. Long-term income investors should favor the stronger-performing Verizon over AT&T's slightly higher dividend at this time.

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Chad Henage owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

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