Telecoms are the bread and butter of solid retirement portfolios. Because the capital requirements to building out nationwide networks are so onerous -- and the service these companies provide so necessary -- they make for protected money-printing machines once established. 

That means outsized dividends. The two communications companies we're focused on today, Verizon (VZ -0.17%) and CenturyLink (LUMN -2.60%), have such payouts -- yielding 4.7% and 14.7%, respectively. For investors, it might seem like money actually is growing on trees.

A young, bespectacled man tending a bonsai tree with coins hanging on the branches

Image source: Getty Images.

But which of these two is the better buy today? That's impossible to say with 100% certainty. But by comparing them on a series of three key aspects of their stocks, we can get a better idea of what we're getting when we buy shares. Here's how they stack up.

Sustainable competitive advantages

If you're a long-term, buy-to-hold investor -- and that's what we think you should be here at the Motley Fool -- there's nothing more important to investigate than the sustainable competitive advantages -- otherwise known as "moats." In the most basic sense, a moat is what keeps customers coming back to you year after year while holding the competition at bay for decades.

One key moat all telecoms benefit from is very high barriers to entry. Because of the costs associated with setting up a telecom company -- laying down the wire, building or leasing towers, etc. -- this isn't a terribly crowded field. But because both of these companies are already established, it really isn't a differentiator.

Instead, we can simply look at market share and the different approaches each company is taking toward the future.

According to Statista, Verizon is the largest wireless subscription provider in the United States, with a 35.7% share. In addition, the company is making moves to become a more robust media player. This includes the acquisitions of AOL and Yahoo!. That gives Verizon more flexibility moving forward.

CenturyLink, on the other hand, doesn't even move the needle on a nationwide scale when it comes to market share. Instead, its future is intertwined with the recently completed merger with Level3 communications. As a Tier One provider of internet services via this move, CenturyLink has become one of the largest internet providers in the country, helping it to secure a recent contract with the Commonwealth of Pennsylvania that sent shares soaring.

In the end, it's too close to call a serious winner. As wireless contracts become progressively weaker, market share matters less for Verizon. And it's simply too early to tell if the Level3 merger will produce lasting and sustainable benefits for CenturyLink shareholders.

Winner = Tie

Financial fortitude

Clearly, investors in these two companies would like to see any and all excess cash returned to them. But that's not the most prudent approach over the long run. That's because every business, at one point or another, is going to face difficult economic circumstances. Those with cash on hand can often emerge even stronger.

This strength comes in three forms: being able to buy back shares on the cheap, acquiring distressed competitors, or -- most importantly -- outspending rivals or undercutting their prices to gain long-term market share.

Here's how these two stack up in terms of financial fortitude, keeping in mind that Verizon is valued at 12 times the size of CenturyLink.


Cash Debt Net Income Free Cash Flow
CenturyLink $160 million $25 billion $314 million $462 million
Verizon $6 billion $115 billion $16 billion $5 billion

Data source: Yahoo! Finance. Figures rounded to the nearest whole number. Net income and free cash flow presented on a trailing-12-month basis.

While leverage is common in telecoms, CenturyLink's debt-to-cash ratio is eight times that of Verizon. That means that while a downturn wouldn't necessarily help either of these companies, CenturyLink would be far more vulnerable.

Winner = Verizon


Finally, we have the strange alchemy of valuation. While there's no one metric that can tell you how cheap or expensive a stock is, I like to consult several data points to get a more holistic picture. Here are four of my favorites when it comes to dividend payers.

Company P/E P/FCF Dividend Yield FCF Payout Ratio
CenturyLink 8 37 14.7% 253%
Verizon 14 40 4.7% 181%

Data source: Yahoo! Finance. 

Whether because of one-time events or not, I'm not a fan of either company with such high price-to-free cash flow ratios. Not only does it mean buying a company that's richly valued, but one that has paid out far more in dividends over the past 12 months than it has taken in.

Overall, I consider both to have an unfavorable valuation, but CenturyLink's is more so given its sky-high payout ratio.

Winner = Verizon

My winner is...

So there you have it: I don't like either company very much, but I dislike Verizon less. I think there are better deals for you in the market, even if you're after high dividend payers. That's why I don't own either of these stocks nor have I indicated that they'll be outperformers in my own CAPS profile.