Many investors choose AT&T (NYSE:T) and Verizon (NYSE:VZ), the two largest wireless carriers in the U.S., as their top telecom stocks -- they pay big dividends, trade at low multiples, and have wide moats. Other telecom companies, like CenturyLink (NYSE:CTL) and T-Mobile (NASDAQ:TMUS), generally get less attention.

CenturyLink doesn't own a wireless business, but it became one of the world's largest wireline providers after its acquisition of Level 3 Communications two years ago. However, it lost about two-thirds of its market value over the past five years as its commercial and enterprise revenues declined.

Wireless connections across a city.

Image source: Getty Images.

T-Mobile, the third largest wireless carrier in the U.S., doesn't own a wireline business. Its majority owner Deutsche Telekom is trying to merge it with Sprint (NYSE:S), the fourth largest wireless carrier in the U.S., but the deal remains in limbo due to a lawsuit from multiple state attorneys general. All that merger buzz, along with T-Mobile's stable growth, caused the stock to nearly triple over the past five years.

T-Mobile has clearly been a better investment than CenturyLink, but will that trend continue? Let's take a closer look at both companies to decide.

Which company is growing faster?

CenturyLink and T-Mobile's customer bases aren't directly comparable, since they serve different markets. But in terms of revenue growth, T-Mobile is clearly the stronger company.

YOY revenue growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

CenturyLink

(4%)

(4%)

(5%)

(5%)

(4%)

T-Mobile

8%

6%

6%

4%

2%

Source: Company quarterly reports. YOY = Year-over-year.

CenturyLink is struggling with the sluggish growth of the wireline market. Its acquisition of Level 3 reduced the weight of its consumer business to just 25% of its revenue and expanded its overseas presence, but macro challenges and poor pricing power are throttling its growth.

Meanwhile, T-Mobile continued to grow amid tough competition from AT&T and Verizon, thanks to 26 straight quarters of over a million net customer additions. It continued to gain customers with competitive prices and attractive perks like data-free video streaming. However, investors should note that CEO John Legere -- who spearheaded those strategies and the company's proposed merger with Sprint -- will step down in May 2020.

Analysts expect CenturyLink's revenue to decline 5% this year and drop another 3% next year. T-Mobile's revenue is expected to rise 4% this year and 5% next year, but those figures could be revised upwards if the Sprint merger is approved.

Dividends and profitability

CenturyLink cut its dividend earlier this year, but it still pays a whopping forward yield of 7.6%. T-Mobile doesn't pay a dividend.

CenturyLink's new dividend is easily sustainable, since it only used 44% of its free cash flow (FCF) over the past 12 months. However, investors' gains from those dividends were wiped out by the stock's 12% decline during the same period.

Moreover, its FCF fell 16% annually last quarter, indicating that its cash dividend payout ratio will continue rising. CenturyLink's debt-to-equity ratio is also much higher than T-Mobile's, due to recent acquisitions like Level 3, and extinguishing debt usually takes precedence over paying dividends.

CenturyLink and T-Mobile are both consistently profitable. At first glance, both companies' earnings growth seems to be decelerating -- but that's mainly due to year-over-year distortions caused by tax reform measures in 2018.

YOY EPS growth

Q3 2018**

Q4 2018**

Q1 2019

Q2 2019

Q3 2019

CenturyLink*

67%

(65%)

36%

31%

3%

T-Mobile

48%

(76%)

36%

18%

9%

YOY = Year-over-year. Source: *Excludes certain integration expenses. **Impacted by tax reform.

Looking ahead, analysts expect CenturyLink's earnings to rise 11% this year and 9% next year as it continues to cut costs and pivot away from lower-margin equipment sales. Analysts expect T-Mobile's earnings to grow 19% this year and 20% next year, even as it matches AT&T and Verizon's prices.

The valuations and verdict

CenturyLink's forward P/E ratio of nine is much lower than T-Mobile's forward P/E of 16. However, that discount is arguably justified by its sluggish revenue growth, higher debt, and dependence on cost-cutting measures to drive its bottom line growth.

Meanwhile, T-Mobile remains a solid investment, regardless of what happens with Sprint. In short, investors who value a stock's potential price appreciation over steady dividends should buy T-Mobile instead of CenturyLink. Investors who care about dividends should stick with AT&T and Verizon instead.