Please ensure Javascript is enabled for purposes of website accessibility

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

By Adam Levy – Sep 2, 2016 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It depends on what investors prefer: Stable cash flows and a growing dividend, or a swelling subscriber count?


Image source: Getty Images.

Not a lot of consumers are shopping around for a new wireless carrier these days, but if you're looking to invest in one, Verizon Communications (VZ 1.66%) and T-Mobile US (TMUS 2.62%) are your two best options. Both carriers have consistently added valuable postpaid subscribers during a period of fierce competition among the four major wireless service providers. And while T-Mobile is a pure-play wireless carrier, Verizon offers more diversity with its wireline and digital media/advertising businesses.

Here are a few things for investors to consider when determining which is a better buy.

Growing subscribers

Over the last 12 months, Verizon and T-Mobile have each added around the same number of postpaid connections -- a bit over 4 million. Postpaid subscribers pay their bill after the service has been rendered, are more creditworthy, and are generally considered more valuable.

But where Verizon's growth generally stems from tablets and connected devices, more than 3 million of T-Mobile's postpaid additions were phone subscribers. Phone subscribers are much more valuable than tablet or connected device customers, as they produce higher average revenue.

T-Mobile is exhibiting the fastest growth in postpaid phone subscribers of any wireless carrier. Last year, it took over 100% of postpaid phone net additions in the industry. While net additions have slowed down in 2016 compared to last year, they're still way ahead of Verizon. Verizon's net additions have slowed down as well as the market saturates and subscribers switch less often.

Verizon's sticky customers

Although T-Mobile is growing its postpaid phone subscriber base at a faster clip than Verizon, Verizon's customers tend to be stickier and more valuable. Verizon's average revenue per connection is $48.04, which is higher than T-Mobile's average revenue per postpaid phone subscriber of $46.67. Keep in mind, Verizon's number includes its tablets and connected devices connections as well, which produce less revenue per connection.

Verizon's churn rate is significantly lower than T-Mobile's, coming in at 0.94% compared to 1.27% for T-Mobile's phone customers. Verizon's churn rate is also negatively impacted by a free tablet promotion it ran two years ago.

Verizon benefits from a lot of accounts supporting multiple devices, indicative of family plans. Family plans are the least likely to switch carriers as they require coordination among multiple users. As of the end of the second quarter, Verizon had 3.02 connections per account. T-Mobile had just 2.64 customers per account, and it's added 0.21 customers per account over the trailing 12 months.

A look at valuation

T-Mobile is certainly priced for growth with a P/E ratio floating around 36. Verizon, by comparison, is priced at less than 15 times its trailing-12-month earnings.

Indeed, analysts are expecting a big jump in earnings from T-Mobile next year, and if you compare earnings ratios based on 2017 earnings expectations, the gap closes quite a bit. T-Mobile's 2017 P/E ratio is about 23, while Verizon trades for 13 times estimates for next year.

Verizon's sticky customer base provides strong cash flow, though, producing $15.4 billion in free cash flow over the trailing twelve months. For reference, T-Mobile's free cash flow was $1.61 billion in the same period.

Verizon's free cash flow allows it to support its dividend and continually increase it year after year. Verizon's management has increased its dividend for nine straight years, with an average increase of 2% to 3% over the last few years. Still, its dividend payout ratio is a manageable 63%, making it an attractive option for dividend growth investors.

Investors looking for growth and a pure play in the U.S. wireless industry should buy T-Mobile. It's by far the fastest-growing carrier and it's investing heavily to continue growing more than the competition. That means it's unlikely to start paying a dividend anytime soon, but investors could reap the benefits of capital gains.

The matter of which is a better buy really depends on your portfolio strategy. If you're in growth mode, T-Mobile likely fits your needs. If you're looking to round out a dividend portfolio with a telecom company, no other telecom provides a better dividend than Verizon.

Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$142.54 (2.62%) $3.64
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$39.81 (1.66%) $0.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.