AT&T's stock price tumbled about 20% in that three-year stretch as it struggled with its ongoing loss of pay TV users, tough competition in the wireless market, and its costly and unwieldy takeover of Time Warner. Even after factoring in reinvested dividends, AT&T's stock delivered a negative total return of 4%.
T-Mobile's stock price more than doubled as it pulled wireless subscribers away from AT&T and Verizon (VZ 0.00%). It also completed its merger with Sprint last April, which helped it surpass AT&T to become the country's second-largest wireless carrier after Verizon. T-Mobile doesn't pay a dividend, but it clearly impressed investors with its robust growth.
T-Mobile has clearly been the stronger investment than AT&T, but past performance never guarantees future gains. Let's take a fresh look at both telecom companies to see which is the better investment.
What went wrong at AT&T?
AT&T's acquisition of DirecTV in 2015, which was intended to shore up its pay TV business, backfired over the past six years as the platform lost subscribers to over-the-top streaming services like Netflix.
To counter those cord cutters, AT&T acquired Time Warner in 2018 to build its own streaming business. Those two massive acquisitions, along with its purchases of expensive spectrum licenses, boosted its total debt from $82.1 billion at the end of 2014 to $147.5 billion at the end of 2020.
To make matters worse, the pandemic disrupted Time Warner's TV and movie businesses just as AT&T started to integrate the sprawling business. Those disruptions, along with its ongoing loss of pay TV users and its tepid growth in wireless subscribers, caused its revenue to decline 5% in 2020.
Its adjusted EBITDA margin dipped from 32.7% to 31.8%, while its adjusted earnings per share fell 11%. Its free cash flow declined 5% to $27.5 billion, and it reduced its total debt by less than 10% -- even after it cut costs and divested some non-core assets. AT&T is currently in talks to sell DirecTV, but it recently took a $15.5 billion impairment charge on the business as those talks drag on.
All these headwinds are sparking concerns about its forward dividend yield of 7.2%. AT&T can easily cover that payout, which cost nearly $15 billion last year, with its FCF -- but it would arguably be smarter to suspend that payout and reinvest that cash into WarnerMedia's streaming ecosystem.
Analysts expect AT&T's revenue to rise less than 1% this year and for its earnings to dip 1% as this messy balancing act continues.
What went right at T-Mobile?
As AT&T has tried to keep all those plates spinning, T-Mobile has caught up in the wireless market by promoting an "un-carrier" strategy that simplified plans by eliminating contracts, subsidized phones, data coverage fees, and early termination charges. It also provided free international roaming, data-free media streaming, and unlimited text, talk, and data plans.
Unlike AT&T and Verizon, T-Mobile wasn't burdened by legacy landline, broadband internet, and pay TV services. Its smaller streaming video unit provides skinny bundles of over-the-top channels, but it isn't trying to become a media juggernaut like AT&T.
Instead, T-Mobile prioritized three things. First, it maintained its aggressive promotional strategies to pull subscribers away from AT&T and Verizon. Second, it continued to pursue a merger with Sprint, which was initially announced in 2018 but faced regulatory hurdles before finally closing in 2020.
Lastly, T-Mobile continued to upgrade its 5G networks with low-band spectrums that covered wider areas than AT&T and Verizon's higher-band spectrums. As a result, T-Mobile's 5G network now has nearly two and half times the coverage of AT&T's 5G network and nearly four times the coverage of Verizon's 5G network.
Those achievements are reflected in its results. T-Mobile's revenue soared 60% in 2020, and analysts expect its revenue to grow another 15% this year after it laps its merger with Sprint. Its earnings fell 34% in 2020 due to merger-related expenses, and analysts expect another 6% decline this year before a double-digit percentage rebound next year.
T-Mobile's long-term debt rose nearly sixfold to $61.8 billion last year after the merger, but its debt-to-equity ratio remains much lower than AT&T's.
The clear winner: T-Mobile
The choice between AT&T and T-Mobile is a simple one. The former is sinking under the weight of its convoluted businesses, high debt, and dividend obligations, while the latter is a streamlined play on the wireless market.
AT&T's stock looks cheap at nine times forward earnings, while T-Mobile has a much higher forward P/E ratio of 36. But based on my observations, AT&T should trade at a discount, while T-Mobile deserves a slight premium. Therefore, I believe T-Mobile will easily outperform AT&T throughout the rest of the year.