In a battle between troubled telcos, AT&T (T -0.87%) and Sprint (S), which would be the better investment? Sprint has a transformative merger coming up, while AT&T is banking on its entertainment division to make a big impact.

These two companies have very different futures planned. Let's dig into each to determine the better buy.

Young woman texting on her smartphone.

Image source: Getty Images.

Sprint today

Sprint stock shot up in February, a few days after hitting a 52-week low of $4.26, when a federal judge approved its merger with T-Mobile (TMUS 0.94%). But merger aside, Sprint offers little for investors to be excited about.

The company has failed to make a profit for the past four quarters. In its fiscal year 2019 third quarter, which ended Dec. 31, Sprint reported a net loss of $120 million. Its $8.08 billion in revenue for the quarter was a year-over-year decline from 2018's $8.6 billion. Its financial woes are part of the reason the judge approved the merger.

Sprint's one advantage is its radio spectrum rights. Once the merger is complete, the combined T-Mobile and Sprint (referred to as the new T-Mobile) will possess frequency assets in three important spectrum bands, giving it an advantage over competitors AT&T and Verizon with its 5G rollout.

The new T-Mobile could debut as early as April 1 with an estimated 126 million subscribers, putting it not far behind AT&T's estimated 141 million subscribers. But further growth relies on taking customers from competitors. That's because the U.S. market is at a mobile subscriber saturation point. Here, Sprint accomplished modest gains in mobile postpaid subscribers with 494,000 net additions in the third quarter. 

Postpaid subscribers are considered more valuable than prepaid subscribers because they typically use and pay for more services as well as possess lower attrition rates. Combined, these attributes lead to higher average revenue per user (ARPU). But Sprint's growth is just a fraction of T-Mobile's 1.3 million mobile postpaid subscriber increase in its fourth quarter, which ended Dec. 31. T-Mobile is the more successful of the two companies, so at this point, Sprint's future is tied to its T-Mobile merger.

AT&T today

When comparing AT&T's financials with Sprint's, there's no contest. This is despite AT&T's substantial debt of $151 billion due to its acquisitions of Time Warner and DIRECTV, and its lower 229,000 net postpaid phone subscriber additions in its fourth quarter. 

That's because Sprint's revenue is a shadow of AT&T's fourth-quarter revenue of $46.8 billion. The same goes for Sprint's net loss in the quarter against AT&T's net income of $2.4 billion.

In addition, AT&T is a dividend-paying stock, delivering more than a 6% yield currently. Sprint does not offer a dividend. AT&T is a Dividend Aristocrat, with plans to continue raising its dividend for the next three years while maintaining that payout using less than 50% of its free cash flow.

Where doubts begin to creep in is with AT&T's growth strategy. The company acquired Time Warner to create a new streaming service, HBO Max, launching in May. Combined with a new streaming television option, AT&T TV, which debuted March 2, they are intended to be the nexus of a streaming entertainment network capitalizing on cord-cutting.

Meanwhile, its DIRECTV satellite business was once a prominent part of AT&T's entertainment offerings but has been losing subscribers. The rate of decline is large enough that AT&T's chief operating officer, John Stankey, admitted the company "didn't see satellite delivery as necessarily a growth vehicle for entertainment moving forward."

That's why AT&T is betting its entertainment division's future on streaming, but its new AT&T TV service is a frightening reflection of cable TV history. It's too early to tell if this approach will pay off, but in light of cheaper streaming rivals like Netflix, AT&T TV's byzantine pricing and packaging strategy is puzzling.

Its other tactic for revenue growth is to continue building out its 5G technology and encourage consumers to upgrade to 5G-enabled phones. The question will be whether consumers prefer Sprint's superior 5G technology and, as the new T-Mobile, its customer-friendly pricing plans designed to snatch customers from AT&T. 

The final verdict

Contrasting today's AT&T to Sprint, from a financial perspective, AT&T wins hands down. AT&T's solid dividend yield and diversified portfolio's ability to generate substantial revenue is appealing. Meanwhile, Sprint's ailing finances do not bode well.

It's only in Sprint's merger with T-Mobile that doubts arise about which has the better long-term prospects, Sprint or AT&T. A combined Sprint and T-Mobile make a formidable rival, while AT&T's unfriendly consumer pricing strategy behind AT&T TV creates concern. But until the new T-Mobile arrives, as of today, AT&T is the better buy.