AT&T (T 1.60%) and T-Mobile (TMUS 0.16%): a tale of two telcos. A decade ago, AT&T attempted to acquire a struggling T-Mobile before those plans fell apart amid antitrust scrutiny. Today, T-Mobile is a revitalized company experiencing tremendous success. It bought rival Sprint last year, and its stock hovers near a 52-week high of $148.70 at the time of this writing. Meanwhile, AT&T stock rests around $29 per share as the company digs its way out of a mountain of debt accumulated during an entertainment acquisition spree.

Can AT&T bounce back? If so, can T-Mobile maintain success amid a very competitive U.S. telecom market? Let's compare these two telco titans to assess which is the better investment.

A smiling person walking outdoors texts on their mobile phone.

Image source: Getty Images.

The case for AT&T

AT&T is in transition after a rough 2020. Last year, its revenue dropped over $9 billion from 2019 due to the coronavirus pandemic. This increased pressure on the company to do more to manage its massive debt load.

Consequently, new CEO John Stankey, with less than a year on the job, decided to spin off pricey entertainment acquisitions DIRECTV and WarnerMedia. The sudden reversal makes sense. The company needed to focus on its core telecom business in the all-important race to deliver 5G wireless networks.

The renewed focus is paying off. Postpaid customers are the most valuable in the telecom industry, and in the first quarter of this year, AT&T reported nearly 600,000 postpaid phone net adds, the highest Q1 result in over a decade.

This Q1 outcome was the third consecutive quarter of exceptional postpaid phone net adds.

A line chart shows the number of postpaid net adds much higher in the last 3 quarters than in prior 6.


AT&T's ability to attract customers in the critical postpaid category is coupled with near-record low churn. Given 97% of the U.S. population owns a cellphone, attracting customers from competitors, and retaining them, is a must for AT&T to grow revenue.

Speaking of which, AT&T experienced 2.7% year-over-year revenue growth in Q1. The company's free cash flow, key to funding its high-yield dividend while paying down debt, rose 51%. While Q1 results were strong, AT&T expects to adjust down its dividend as a result of spinning off its Time Warner business, which is expected to happen in the middle of next year.

For many investors, AT&T was primarily a dividend play. The news of a dividend decline was unwelcome, but investors can still benefit from AT&T's entertainment bet. Shareholders will receive stock in the new company as part of the spin-off.

T-Mobile's strengths

While AT&T shifts away from its entertainment aspirations, T-Mobile's 2020 success continues into 2021 with an impressive first quarter. AT&T may have experienced strong Q1 postpaid phone net adds, but T-Mobile was the industry leader with 773,000 net additions.

Its Q1 result followed a stellar 2020 where T-Mobile led the industry in postpaid phone net adds. It also saw full-year revenue grow from $45.0 billion in 2019 to $68.4 billion in 2020 despite the pandemic, helped by its Sprint acquisition.

T-Mobile's strategy for continued success is sound. Like its competitors, T-Mobile is building out its 5G network. But while AT&T had to bid $23.4 billion in a February government auction to buy mid-band spectrum vital for its 5G network coverage, T-Mobile bid just $9.3 billion to supplement what it already holds.

Thanks to its merger with Sprint, T-Mobile will have over 70% more mid-band spectrum than AT&T in the coming years. This gives T-Mobile's 5G network the advantage in coverage and performance at a lower cost.

With its superior 5G network, T-Mobile plans to grow its share in smaller markets and among businesses, where its current share is less than 10%. T-Mobile expects to nearly double its market share of business customers over the next five years as 5G adoption ramps up.

The final verdict

Both AT&T and T-Mobile have merits. AT&T's $5.9 billion in Q1 free cash flow overshadows T-Mobile's $1.3 billion. But T-Mobile doesn't have to allocate its free cash flow to a dividend. So which is the better investment in the long run?

Building out a 5G network is capital-intensive. That's where AT&T's debt is a burden. The company's long-term debt at the end of Q1 stood at $160.7 billion. Meanwhile T-Mobile's long-term debt was $66.4 billion in Q1.

T-Mobile has the advantage in 5G spectrum, and a solid strategy for ongoing revenue growth. AT&T is still untangling from its media acquisitions, and its attractive dividend is expected to decline. Given these factors, I think it's safe to say that T-Mobile is currently the better investment.