When it comes to high-yield but stable dividend payments, AT&T (NYSE:T) is a solid option. The company's acquisition of Time Warner (now the company's Warner Media group) was a high price tag that racked up significant debt, and the media business is now in decline due to the economic lockdown to halt the spread of COVID-19. Nevertheless, the bread-and-butter telecom segment is a stable staple service and is generating just enough cash flow to support the stock's current 6.5% annual yield.
For investors looking for income, then, American Tower (NYSE:AMT) may get overlooked. The real estate investment trust (REIT) for telecom operations (180,000 sites globally) only pays a 1.7% yield after raising its payout 20% from 2019. However, while it too makes use of debt to expand, American Tower is getting much more bang for its buck than AT&T has and expects to generate some profit expansion in the year ahead. It's a tough call as to which is the better buy, but simply using dividend yield as a deciding factor won't work as the 5G mobile network upgrade cycle gets under way.
Use of debt and growth
Both AT&T and American Tower operate capital-intensive businesses, and thus make ample use of borrowing. However, the use of said debt is quite different. AT&T operates its telecom network, although about a quarter of its $164 billion in long-term liabilities came from its Time Warner takeover in 2018. By comparison, American Tower has far less debt, with $24.6 billion on its balance sheet, which it uses to acquire real estate it then leases to telecom operators.
Over the last decade, though, the accumulation of real estate assets has made American Tower a big winner. Total return for units of the REIT is 630%, compared with a total return of 120% for AT&T over the last trailing 10-year stretch. That trend could continue. While AT&T notched a 2.3% decline in adjusted earnings in Q1 2020, American Tower posted adjusted funds from operations (AFFO, the equivalent of earnings for a REIT) growth of 5.3%. AT&T withdrew full-year 2020 guidance, but American Tower expects AFFO growth of 3.7%.
Even in uncertain times, mobility has become a basic staple that most consumers aren't going to quickly part ways with. American Tower's pure-play focus is serving it well, while growth at AT&T is getting burdened by its media business. Thus, as far as long-term use of debt and growth is concerned, American Tower gets the nod.
Valuation the ultimate call?
There is, of course, the valuation question. AT&T trades for a meager 8.3 times trailing 12-month free cash flow (revenue less cash operating and capital expenses) versus American Tower going for 33.0 times trailing 12-month AFFO. Thanks to its lack of growth -- at least for the immediate future -- AT&T gets a steep discount. From this standpoint, AT&T looks like the better buy.
However, high-quality growth comes at a premium for a reason. If AT&T isn't able to reverse the recent course of Warner Media and whittle down its sizable load of liabilities, at some point its high-yielding dividend could be at risk of getting cut. As of right now, there's no concern for that happening at American Tower. The big increase in payout, as well as an ongoing share repurchase program, are testaments to that fact. And its free cash flow generation handily covers the current payout while simultaneously allowing it to invest in more telecom properties around the globe.
So what's the better buy? It's a tough call. As of right now, AT&T looks like the better deal and is paying enough in extra dividends to garner some attention. Over the long term, though, and as mobility evolves in the next decade with the slow rollout of 5G, I believe investors will be happier with American Tower. It carries a premium price tag, but that goes with the territory for this high-quality dividend growth story.