AT&T (T 1.04%) and Apple (AAPL 1.98%) seem like very different companies on the surface. Yet both have joined the streaming media frenzy, launching streaming services to capitalize on the cord-cutting trend. The move isn't just about a new revenue opportunity.
Both see streaming video as one component of a larger ecosystem. The goal is to attract and retain customers by creating a series of indispensable services that complement and build on each other.
How well has the strategy succeeded for each? That question can't be answered without considering the coronavirus pandemic's impact, which introduced a disruptive wild card to everyone's best-laid plans. We'll look at both companies in light of the pandemic's effects to determine which is the better investment.
AT&T has been hit hard by the pandemic. It decided to build a media empire to complement its telecom ecosystem through the costly acquisitions of DIRECTV and Time Warner, Inc., renamed WarnerMedia.
The resulting debt load, currently at $152 billion at the end of the second quarter, caused concern among investors. Worse, DIRECTV consistently lost subscribers as consumers cut the cable TV cord. Then the pandemic struck.
In the first quarter, the company's WarnerMedia division experienced a $1 billion drop in year-over-year revenue as the pandemic caused theater shutdowns and sporting event cancellations, resulting in the loss of lucrative theatrical and television advertising income. The declines only widened in the second quarter, as WarnerMedia revenue fell by $2 billion year over year.
As a result, AT&T is cutting expenses. Some stores closed due to the pandemic will not reopen. Workforce reductions are happening, and other cost-cutting measures, such as operational efficiencies, are being pursued.
AT&T's bright spot is its core telecom business. This continues to provide a steady income stream. AT&T generated $12 billion in cash from operations and free cash flow of $7.6 billion in Q2, both increases from the first quarter's $8.9 billion and $3.9 billion, respectively, when the pandemic's effects were first felt. This allows AT&T to continue paying down its debt and funding its high-yield dividend, which is more than 7% at the time of this writing.
Among the most dependable stocks for your portfolio is Apple. The company's strength lies not just in its iconic computers and iPhones. Apple has created an ecosystem of digital services, such as its iCloud file storage solution, that complement its devices.
This services division produced record high revenue of $13.3 billion in Apple's fiscal second quarter, ended March 28, despite the beginnings of the pandemic. That performance was followed by $13.2 billion in the third quarter, ended June 27, deep into the pandemic.
Apple's strategy is working. While many companies are reeling from the pandemic's economic impact, Apple generated an 11% year-over-year revenue increase in the third quarter. Sales grew across every major Apple product line as well as its services, enabling the company to hit a record high active installed base across its devices.
Apple consistently generates massive amounts of cash, which means its financial health is strong. Even with retail stores closed due to the pandemic, the company exited Q3 with $33.4 billion in cash and equivalents. Its success during difficult times led the company to declare a 4-for-1 stock split.
Apple also offers a dividend. Its low payout ratio of 25.8% ensures the company can easily maintain it. In April, Apple increased its dividend 6%.
The final verdict
Which stock is the better choice? Its resiliency and impressive financial results amid a global pandemic make Apple the better investment.
AT&T's struggles will subside once the pandemic passes and economic recovery occurs, making it an attractive stock. The challenge is that the recovery could take months or years. The patient investor can collect a hefty dividend payout in the meantime.
With Apple's strong device sales, ecosystem of services, and consistently solid financials, this tech stalwart will provide years of stability to your investment portfolio. Its dividend yield is a low 0.86%, so AT&T is the better income stock.
However, the loyalty of Apple's customers (famed for lining up in front of stores to buy the latest Apple gadget), its services ecosystem (further strengthened by impressive device sales), and its excellent financial position make Apple the safer investment between these two companies. Its performance throughout the pandemic underscores Apple's resiliency, especially during uncertain economic times.