T-Mobile (NASDAQ:TMUS) shares have been on a tear over the past year, up about 34% over that time frame and closing on Feb. 19 at a 52-week high of $101.35. Meanwhile, rival AT&T (NYSE:T) has risen 25% over the past year, and shares remain below $40. At less than half the price of T-Mobile, AT&T might look appealing, but is it? Fools know that you can't judge a stock by its price. 

And when it comes to T-Mobile, top of mind is its impending merger with Sprint (NYSE:S). What are the implications? Let's dig deeper to determine which telco is the better buy.

A woman wearing sunglasses and sitting on a wooden bench outdoors is looking at her smartphone with a surprised, happy expression

Image source: Getty Images.

The new T-Mobile

Let's first look at a key factor in the recent rise of T-Mobile stock. The company has long yearned to combine forces with Sprint, and it finally got great news when a federal judge recently approved the merger. Analysts view the combined company, to retain the T-Mobile name, in a positive light, though this merger is a tale of two cities. 

T-Mobile experienced a stellar fourth quarter. It enjoyed 4% year-over-year revenue growth, delivering $11.9 billion compared to 2018's $11.5 billion. This outcome marked an all-time high in revenue for the company. That's not all; net income grew an impressive 17% year-over-year.

On the flip side, Sprint's revenue declined in the fourth quarter, with the company bringing in $8.08 billion compared to 2018's $8.6 billion, a 6% drop. In addition, Sprint has consistently failed to make a profit over the past year, delivering a net loss of $120 million in Q4.

In the most recent ruling, the judge noted both Sprint's deteriorating financial health and T-Mobile's position as an industry "maverick." Certainly, T-Mobile has its work cut out for it as it tries to bring Sprint's part of the business back to profitability, while at the same time, spending on infrastructure to implement a 5G wireless network to unlock faster mobile internet speeds. The company said in its 10-K filing for fiscal year 2019 that the "combination of two independent businesses is complex, costly and time-consuming and may divert significant management attention and resources to combining our and Sprint's business practices and operations."

Despite the challenges, this merger is important for T-Mobile as it will give it Sprint's radio spectrum rights. The merger will make the new T-Mobile the first major wireless carrier to own frequency assets in three critical spectrum bands, which will give it an advantage with its 5G rollout. T-Mobile will not be limited to the millimeter wave spectrum currently used in 5G, which has limited range and cannot penetrate walls easily, and consequently, isn't used much outside the U.S.

T-Mobile and Sprint revised their merger agreement in February, after the judge's ruling, and said the deal could close as early as April 1. The combined company is estimated at 126 million subscribers, behind AT&T's 141 million and Verizon's 150 million. While other details of the new T-Mobile are unknown, T-Mobile FO J. Braxton Carter said on the last earnings call that he expects continued margin gains after the merger. CEO John J. Legere, who led T-Mobile's revitalization as the maverick network after AT&T's failed attempt to buy the company, will depart on May 1.

Beyond its gain of Sprint subscribers, T-Mobile's continued growth will depend on taking customers from its rivals (since the U.S. market is at a saturation point in terms of mobile subscribers. Between the impending management changes and the integration efforts with Sprint, T-Mobile will have challenges continuing its momentum. 

What about AT&T?

AT&T is spending on a 5G network of its own, adding to its already substantial debt. This debt, combined with the rapid decline in its DIRECTV business, has been a drag on the stock price. To its credit, AT&T committed to a goal of reaching 2.5 times debt-to-EBITDA by the end of 2019, and achieved it.

This puts the company's position well below the 4 to 5 range that is often considered high debt. AT&T paid down its debt using some of its free cash flow as well as selling non-essential assets to the tune of about $18 billion. This debt reduction benefits shareholders in the long run by reducing interest payments as well as improving AT&T's credit rating and the company's overall financial health.

Moreover, the company acquired Time Warner, Inc. in 2018 (a big part of AT&T's debt growth) to create its new HBO Max streaming service, debuting in May. This streaming entertainment network will capitalize on the cord-cutting trend, offering content unavailable on other streaming services, including original shows such as Watchmen and old favorites like Friends.The company plans to fold its existing streaming brands into HBO Max with the exception of AT&T TV, which will remain separate for live television events like sports. AT&T intends to use HBO Max as a carrot for customers to join its highest-revenue wireless plans.

The streaming strategy complements the company's move to 5G; faster internet speeds make a streaming service more compelling. AT&T expects to have nationwide 5G access available by the second quarter of 2020. As consumers upgrade to a 5G phone, they will be exposed to HBO Max subscription opportunities. The combination of AT&T's existing wireless customer base, distribution network, and library of Warner programming and original shows give AT&T an advantage in the streaming wars. 

In addition, AT&T charted a growth path for the company during its last earnings call, planning for a 1% to 2% compound annual growth rate (CAGR) through 2022. Its fourth-quarter 2019 revenue of $46.8 billion is more than double what T-Mobile and Sprint combined could deliver.  Also, AT&T experienced record free cash flow of $29 billion for the full year. AT&T will put this income to use in beneficial ways for investors, such as a share repurchase program.

These qualities make AT&T a compelling investment, but there's more. The company has a fiber business of nearly 4 million subscribers. With the fiber optic industry projected to grow at a 12.3% compound annual growth rate through 2024, AT&T has an opportunity to take advantage of this growth. (The business grew 2.7% year-over-year in the fourth quarter.) It's also a dividend-paying stock, currently delivering more than a 5% yield. Neither T-Mobile nor Sprint offers a dividend. AT&T has raised its dividend amount for over 34 straight years, making the stock  a Dividend Aristocrat. The company has said it plans to continue increasing this dividend for at least the next three years while paying out less than 50% of its free cash flow. 

My verdict

A combined T-Mobile and Sprint presents one type of investment opportunity. It's the exciting upstart with a technology advantage around the rollout of 5G. However, the arrival of a new CEO amid a major merger brings uncertainty about growth, especially since that growth is predicated on taking market share from larger rivals AT&T and Verizon.

AT&T presents another type of investment opportunity, a slow and steady approach where investors collect a dividend as the stock gradually inches up through the company's conservative capital allocation plan. AT&T has an advantage over the new T-Mobile in that it's not a pure wireless player. Its assets beyond wireless, like its entertainment and fiber divisions, make it a more diversified business. Moves like potentially selling off its ailing DIRECTV business to rival DISH Network, would give AT&T options as the behemoth works to streamline its operations. AT&T has staying power.  

Which is the better buy, the new T-Mobile or the venerable AT&T, depends on your investment style and which of the above factors matters most to you. Growth investors may find the new T-Mobile's 5G advantages and focus on the wireless industry more appealing while income investors may gravitate to AT&T's dividend, greater cash flow production, and diversified portfolio. Being in the latter camp, my vote is for AT&T.