The competition between AT&T (T 1.88%) and Verizon Communications (VZ -0.53%) has favored Verizon in recent years, as AT&T invested heavily in non-5G assets. Although AT&T made costly mistakes in its non-5G ventures, it has now worked to correct those errors.
The question now for investors is whether that makes AT&T stock a better choice than buying Verizon. Let's take a closer look.
Where AT&T stands
AT&T has finally begun to address the poor performance of its non-5G investments. DirecTV cost AT&T $67.1 billion in cash and added debt back in 2015. Earlier this year, its spinoff valued the asset at just $16.25 billion. Also, while the spinoff of WarnerMedia nets AT&T $43 billion, investors may recall that AT&T purchased the former Time Warner for $109 billion.
To address these missteps, AT&T announced it would "adjust" its dividend expense to the $8 billion to $9 billion range. This is down from the previous $15 billion and ends AT&T's Dividend Aristocrat status. AT&T had increased its dividend for 36 straight years before this adjustment.
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Despite these painful decisions, the company has experienced some early successes. On the second-quarter 2021 earnings call, CEO John Stankey announced that fiber customers rate AT&T No. 1 in customer satisfaction. Moreover, churn in both postpaid phone and broadband dropped to record lows, and it posted its best numbers for net adds in more than a decade.
Furthermore, AT&T reported revenue of $88 billion for the first two quarters of 2021, a 5% increase compared with the first six months of fiscal 2020. Net income for the period came to $9 billion. This amounts to a 55% increase over the same period. Interest expenses fell, and other income nearly tripled as the company reported a $2.8 billion actuarial gain in the first quarter.
These improvements could help AT&T address its debt, which stood at just under $180 billion as of the end of the second quarter. Considering that the stockholders' equity (the company's value after calculating assets minus liabilities) also stands at $180 billion, this obligation weighs heavily on the balance sheet.
Reducing debt could also help AT&T stock. It has lost about 5% of its value over the past 12 months. Even though a price-to-earnings (P/E) ratio of 18 compares well with historical levels, it appears high for a company that has failed to gain much traction on the earnings front.
The state of Verizon
Despite AT&T's improvements, Verizon continues its focus on quality. It recently won the RootMetrics award for best overall network performance for the 15th year in a row. For the 26th consecutive time, it won JD Power's No. 1 ranking for network quality.
Perhaps more importantly, when comparing Verizon's Q2 2021 earnings call to that of AT&T, the obvious difference is Verizon's emphasis on a key driver of 5G growth -- network as a service (NaaS). NaaS is a subscription-based service that can enable and connect AI, virtual reality, and Internet-of-Things (IoT) applications. This can power applications ranging from self-driving cars to distance learning to telemedicine.
To bolster this service, it spent $45 billion on C-Band spectrum early in the year, nearly twice what AT&T spent. Spectrum amounts to wireless "real estate," allowing exclusive use of a frequency band that can support 5G-level wireless service.
Still, this spectrum purchase helped raise Verizon's debt to $152 billion. While not as high as AT&T's debt, Verizon's $75 billion in equity makes this burden more of a strain.
Nonetheless, for the first two quarters of 2021, such functionality helped the company bring in over $66.6 billion in revenue, 7% more than in the first six months of 2020. Also, net income surged 24% during that period to $11.3 billion on slower growth in operating expenses, lower interest expense, and an increase in income from finance-related functions.
Moreover, while Verizon has not yet achieved Dividend Aristocrat status, it has hiked its payout every year since 2007. No sign has emerged that this will change. With a current yield of 4.5%, it will likely exceed the return of AT&T's new dividend level.
The dividend made up all of the returns as Verizon stock registered a 2% decline over the last 12 months. Nonetheless, with a P/E ratio of 11, it trades at a cheaper valuation than AT&T.
AT&T or Verizon?
Although AT&T's surge in revenue and earnings growth should encourage investors, I believe Verizon is the choice between these telecom stocks. Thanks to its avoidance of costly missteps, Verizon has been able to keep up its dividend while trading at a lower valuation. Moreover, the potential for its NaaS revenue stream should help Verizon pay down its debt and boost its earnings growth over time.
