Verizon Communications (VZ 1.75%) and AT&T (T 1.67%) have long operated as each other's main competitors. As longtime providers of telecom services, they have battled to attract the same customers since consumers began switching to mobile phones. Now, together with T-Mobile, they continue to compete for wireless business as the telecom industry transitions to 5G.
The approaches pursued by Verizon and AT&T have taken each of these telecom stocks on different trajectories. These paths could determine which stock offers investors more profit potential going forward.
Where each company stands
Despite these companies making up two-thirds of a 5G oligopoly, these businesses differ in surprising ways. AT&T invested outside of 5G, acquiring DirecTV and Time Warner in recent years in the hopes of gaining market share in the content business. However, streaming services have undercut pricing on satellite TV services. Moreover, AT&T's content subsidiary, now known as WarnerMedia, faces stiff competition from the likes of Netflix and Disney.
Verizon initially tried the same path, acquiring Yahoo! and AOL, forming a subsidiary called Oath. Verizon has since renamed it Verizon Media and has de-emphasized its media arm, preferring to focus more heavily on 5G.
The market appears to have favored Verizon's approach. Over the last 10 years, Verizon's stock has steadily increased in value. Conversely, AT&T has continued to struggle, with the stock having risen by just under 27.1% in that period. Verizon stock increased by 112.2% during that time.
AT&T's challenges may stem from its higher long-term debt, which stood at $147.2 billion as of the last quarter. This compares to Verizon's long-term debt of $106.56 billion. As each company spends billions every year to build its 5G network, debt levels have steadily increased. Still, the debt has placed more pressure on AT&T, and rumors persist that declining subscriber numbers will force AT&T to sell DirecTV.
Who wins on valuation?
The market appears to have priced in AT&T's challenges. Investors recently sold off AT&T stock as the general market downturn took hold in February. The stock reeled further as the company withdrew forward guidance and suspended its share buyback program. The company trades at a current P/E ratio of around 15.7, taken higher by falling profits, which are expected to shrink by 9.5% this year. Analysts predict that profit growth will resume, but they only expect average earnings growth of 3.4% per year over the next five years.
This stands in contrast to Verizon, which continues to publish forward guidance for the current fiscal year. Despite this increased certainty, it trades at a lower multiple than AT&T, with a current P/E ratio of approximately 12.3. Analysts also expect earnings reductions of only 1% for Verizon this year. Still, with average five-year growth predicted at only 1.9% per year, the stock may underperform AT&T in future years.
Both offer generous dividends
The one area where AT&T seems to outperform Verizon is on dividends. AT&T's current yield now stands at about 7%, much higher than Verizon's yield of around 4.6%. Considering that the average dividend yield for the S&P 500 is approximately 2%, both companies offer generous dividends.
However, at a payout ratio of about 64.5%, AT&T may have a more expensive debt burden. Moreover, AT&T has Dividend Aristocrat status with a 35-year streak of dividend increases. Surrendering this status can bring years of pain to a stock. Hence, this benefits shareholders as the company will likely continue the streak if possible.
Verizon's more modest dividend faces less pressure. Due to its payout ratio of around 51.7%, a bare majority of company profits go to the dividend. Furthermore, with a 15-year streak of dividend increases, the company does not have the blessings or the burdens of Dividend Aristocrat status. However, walking away from that streak would probably also bring the stock some pain, making it more likely that Verizon's board will probably choose to continue the annual payout hikes.
AT&T or Verizon?
The rise of 5G could spark technical innovations not yet invented. For this reason, I expect being part of the 5G oligopoly should serve both companies well despite lower growth rates.
Still, I think the more suitable choice comes down to risk tolerance. With a lower dividend and smaller debt levels, Verizon is probably more appropriate for risk-averse investors. Many will also take comfort in the much higher growth rate of Verizon stock over the last decade.
However, past performance does not guarantee future results. No matter what happens to the 5G part of the company, AT&T should also prosper because of its role in 5G. This could spark some long-overdue growth in the stock price. Moreover, even though the dividend is both elevated and costly, the company is unlikely to surrender its Dividend Aristocrat status. This makes AT&T an excellent choice for investors willing to tolerate risk.
AT&T and Verizon should both deliver long-term returns to their investors. However, choosing which one to buy may depend more on the investor than the future of either company.