Both AT&T (T 2.31%) and Verizon (VZ 0.52%) have a long history of dividend payments. Each has solid cash flows to support on ongoing payout. One of the biggest differences, however, is the risk profile.
In the Dividend Stock Hour that aired on Fool Live on Oct. 29, Fool.com contributors Danny Vena and Jason Hall discuss the dividend pros and cons of these two tech titans.
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Danny Vena: Janet asks, "Do you think AT&T is still solid enough to buy?" The other question is, "What do you think of Verizon stock and dividend?" That was from Jane. What I wanted to do is I want to take just a minute and maybe go over how I look at stocks. Even from a dividend perspective, there are several metrics that you look at when evaluating a dividend stock.
So what I want to do is share my screen here for just a moment, and I want to pull up a chart and look at several metrics, and look at how do I look at this. First of all, we've got a 10-year chart here, or a nearly 10-year chart that looks at what is the stock price performance of AT&T and Verizon over the last decade. If you look at AT&T stock price, it's actually down a little bit. So AT&T is essentially flat over the last decade, while Verizon stock is up 83%. That's one thing that you may want to look at, is how is the stock price actually performing?
Now, we're going to take a look at is what the dividend itself is, and in this case, Verizon's dividend is just a little bit higher here than AT&T's. But I mean, that number in and of itself really is meaningless, so let's look at what the dividend yield is, and sure enough, here's AT&T's yield, it's close to 8%, which is pretty high. Generally speaking, and I know this is very general, so I want to put that out there up front, but when you see a stock that has a dividend that is yielding nearly 8%, typically, the market has some concerns about that company. In this case, you're talking about AT&T which has taken on a lot of debt, which has acquired Warner and HBO here recently.
Jason Hall: DirectTV was a stupid investment and it has saddled the company. Here's the thing, I own AT&T, so my perspective might be a little bit different, because this is one that I bought in my mortgage payoff account. I got my 3% [annual percentage rate], my 30-year mortgage, instead of throwing money at that cheap cost, I'm just buying dividend stocks that I think are going to exceed that level of return. I think there's real problems with AT&T. It owns a legacy. The DirectTV business, they paid too much, everybody knew they paid too much when they bought it. Management was too committed to do something and it was a dumb decision.
Danny Vena: Is this something you feel strongly about, Jason?
Jason Hall: No, not really (Both laugh). Yeah. But here's the thing. To paraphrase Peter Lynch, this is the kind of business that should be able to continue to pay that dividend and generate steady cash flows no matter what idiot is running it. Peter Lynch said, "Buy a business that any idiot could run, because eventually, any idiot will run it." I'm not denigrating AT&T's management specifically, but they've done some bonehead things. But I think they've learned, is my point, and the business continues to kick off cash and they've managed to support that dividend. I just think there's a lot of negativity baked in right now, with some risks, they cut the payout, but they grew. Here's the thing, they just grew subscribers, postpaid wireless subscribers. So that's good. The business got a little bit hit this year because the movie theaters are closed, so their movie production businesses taken a bit of a hit.
Danny Vena: Then additionally, they're losing cable subscribers atr that.
Jason Hall: Bleeding cables subscribers. Yeah.
Danny Vena: That's something that's not going to stop.
Jason Hall: I agree. But they own HBO, that's part of their business. So that's going to help offset. They've doubled their number of HBO streaming customers from the beginning of the year. There are bad things, there are problems. But I think to me, the good outweighs the bad. Let me put it this way then I'll shut up. I'm rambling. If you need the income, buy Verizon. If you've got some risks that you can take on that the dividend might get cut and it's not going to meaningfully affect your quality of life, I would buy AT&T. That's what I've done.
Danny Vena: The one other metric that I wanted to look at here is the payout ratio because I don't think investors should ever invest in a dividend stock without really considering what the payout ratio is. Of course, if you look here, Verizon is only using about half of its profits to fund the dividend, AT&T is using more than that, but it's important to remember that AT&T has a little bit more of a capital-intensive business, and it has a lot more depreciation and non-cash charges.
Jason Hall: Remember those comments about boneheaded moves? They've taken some big write-offs too, some big non-cash write-offs.
Danny Vena: Absolutely.
Jason Hall: Put in cash payout ratio. This is operating cash flow minus capex, and this is where I base my thesis. You adjust for the boneheadeness and the noncash aspects of the business, and they basically pay out the same amount of their cash flows. This is what underpins it for me. But here's the key, this is important because you look at that non-cash payout ratio, they're writing off assets. Those assets were assets that they were depending on generating cash flow is down the road. So they don't have implications today, but they absolutely have future implications. That's important, isn't it, Danny?