The ongoing changes at AT&T (T 1.02%) continue to alter the competitive battle between it and its largest competitor, Verizon (VZ 1.17%). Amid the spinoff of Warner Bros. Discovery (WBD -2.17%), AT&T's lower stock price has changed the competitive dynamic between the two companies.
The end of AT&T's Dividend Aristocrat status made Verizon's dividend more attractive to many because of its certainty. Despite its reduced dividend, AT&T still maintains a generous payout to shareholders. And with AT&T's business now more closely resembling that of Verizon, has it become the better dividend stock?
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How the new AT&T stands out
Despite the aforementioned loss of Dividend Aristocrat status, AT&T still pays a substantial dividend. The new annual amount of $1.11 per share yields 5.7%, exceeding Verizon's current yield of 4.8% and coming in four times higher than the S&P 500 average of about 1.4%. This difference could prove significant given the popularity of telecom stocks for income investors.
AT&T stock surged as it officially spun off the former WarnerMedia division. This separation led to the stock price falling below $20 per share, as AT&T shareholders received just over 0.24 shares of Warner Bros. Discovery for every share of AT&T they had owned.
Nonetheless, AT&T stock rose by 8% following the separation amid a $40.4 billion cash infusion resulting from the spinoff. This helps strengthen a balance sheet strained by more than $177 billion in total debt as of the end of 2021.
Following the WarnerMedia spinoff and the earlier spinoff of its DirecTV division, it has become a telecom services company more like Verizon and T-Mobile. This will orient each company further toward providing 5G services, a business that has become all-consuming amid high costs for wireless spectrum and network deployment. AT&T spent $16.5 billion in capital expenditure in 2021, not including the $23 billion in new long-term leasing of C-band spectrum during that year.
Why some investors may still choose Verizon
Despite Verizon's lower cash yield, it is still an appealing dividend stock. Its payout has risen every year since 2007. This 15-year track record increases the likelihood of further payout hikes, a phenomenon that may have increasingly become an expectation.
Therein might lie the continuing strength of the Verizon dividend. Companies can end dividend payments at any time, but since ending a long-term streak of payout hikes can mean reputational harm, they tend to prioritize continuing those streaks when possible. Nonetheless, AT&T chose to imperil its stock by ending its streak, and with the damage already done, it has less to lose if it chooses to cut its payout again.
Verizon's stock also offers benefits beyond the dividend. Verizon just celebrated its 28th year as J.D. Power's most awarded for network quality. Moreover, it appears to want to hold that title. Its C-band network spending in 2021 amounted to $53 billion, more than double AT&T's outlay.
Furthermore, it leads the way in network-as-a-service (NaaS), giving investors good reason not to underestimate Verizon's stock. NaaS is a subscription data service that connects entities to applications and data to the cloud. This will likely power the tech industry as devices and systems ranging from remote stations to autonomous cars may connect. It could become a lucrative business for Verizon and its peers, though so far, Verizon is the only telco to discuss this business on its earnings calls.
Still, Verizon spent more than $20 billion in capital expenditure in 2021, indicating its costs are also high. Such pressures may have contributed to Verizon stock falling by 5% over the last year. Nonetheless, this takes its price-to-earnings (P/E) ratio to just 10, just above AT&T at seven times earnings, and well below T-Mobile with a 55 P/E ratio.
AT&T or Verizon?
Despite the spinoff, Verizon continues to look like the better choice for dividend investors. While AT&T's dividend yield remains higher, it no longer holds a dividend increase streak, making it less likely to face further consequences if it slashes the payout again. In contrast, Verizon still offers a modest P/E ratio and a healthy dividend yield, bringing dramatically lower risks for only a slightly higher cost.
