Amidst rising inflation, telecom giants AT&T (T -1.37%) and Verizon (VZ -0.68%) are appealing investments. Both offer dividends, which act as a hedge against inflation. And, as two of the biggest telecom companies in the U.S., both companies reliably generate billions in income and free cash flow annually.
They are also both in the early stages of transitioning to 5G networks, creating new revenue growth opportunities. Indeed, 5G isn't just a faster mobile network -- it more easily supports the explosion of devices requiring internet, from smartwatches to cars. AT&T and Verizon both stand to gain from this burgeoning need for connectivity.
Each recently posted first-quarter earnings results, but does one stand out as a better long-term investment? An examination of each can help us to answer that question.
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Why AT&T stock is appealing
AT&T is at an inflection point in its storied history. After John Stankey took over as CEO in 2020, he began dismantling the entertainment empire the company had spent billions to acquire, all in an effort to reduce AT&T's debt and focus resources on its capital-intensive 5G implementation. These efforts concluded on April 8 when AT&T spun off its WarnerMedia entertainment division. With its entertainment holdings divested, AT&T can focus squarely on its telecom business, which has done well over the past several quarters.
AT&T has excelled at capturing customers in the valuable postpaid phone subscriber segment. The company led the telecom industry in 2021 with postpaid phone net additions of 3.2 million, higher than the company's previous 10 years combined. AT&T carried this success forward in 2022, as its postpaid phone net adds reached 691,000 in the first quarter, the highest Q1 total in over a decade.
AT&T's consumer broadband business is also a key revenue driver, thanks to the growth of the company's fiber optic-powered internet service. Broadband contributed $9.1 billion last year, driven by fiber subscription growth. Fiber adoption continued in Q1 this year, rising to 6.3 million connections from 5.2 million last year.
As a result, the company's revenue on a pro forma basis (which adjusts for its divested businesses), reached $118.2 billion in 2021, a 4.3% increase over 2020's revenue of $113.3 billion. AT&T's year-over-year growth continued into 2022, with Q1 pro forma revenue coming in at $29.7 billion, a 2.5% increase over 2021.
AT&T expects year-over-year revenue gains to continue throughout 2022 and into 2023 as well. This rise in revenue will come from continued growth in wireless service and broadband sales.
The case for Verizon
Like AT&T, Verizon has seen success over the past year. The company ended 2021 with $133.6 billion in revenue, up 4% from 2020, and even exceeding 2019's pre-pandemic total of $131.9 billion.
This year, Verizon saw Q1 revenue grow 2% year over year to $33.6 billion, helped by a 9.5% increase in its wireless service sales. The company's broadband service contributed to revenue growth as well, with Q1 net additions reaching 229,000, the best quarter in more than a decade.
Verizon sees its 5G network as the backbone of a slew of services that will drive revenue growth for years. These services include internet access for a range of connected devices as part of the growing Internet of Things (IoT). Verizon is also partnering with Facebook's Meta to provide high-speed internet for the social media giant's metaverse.
Verizon saw over $1.5 billion in revenue from the IoT alone last year. The company estimates growth in these services and 5G adoption will help revenue expand from $110 billion in 2021 to $124 billion by 2025, excluding equipment sales.
Moreover, Verizon increased its dividend for the 15th consecutive year in 2021. The company's excellent dividend track record can continue because of its ability to generate free cash flow. Verizon exited Q1 with $1 billion in free cash flow and $19.3 billion in 2021.
Is AT&T or Verizon the better investment?
In comparing these two companies, Verizon's higher revenue stands out immediately. Also, Verizon's vision for future growth leverages its network in inventive ways, positioning the company to potentially become a building block of the much-discussed metaverse.
That said, Verizon showed troubling signs in its Q1 earnings report. The company suffered a net loss of 36,000 postpaid phone subscribers in Q1. This stands in stark contrast to AT&T's net gain of 691,000. The company also adjusted down its 2022 guidance. In January, the company forecasted 3% organic revenue growth, excluding equipment income, this year. Verizon now expects 2022 revenue to remain flat year over year. Of course, a single quarter's results are not cause for alarm. But while Verizon achieved 1.2 million postpaid phone net adds over the trailing 12 months, AT&T captured 3.3 million -- nearly triple Verizon's amount.
It's worth noting that AT&T reduced its dividend due to the WarnerMedia spinoff. However, AT&T and Verizon both currently have dividend yields around 5%.
The ability to capture customers is critical to success in the telecom industry, particularly in the highly competitive U.S. market. Given AT&T's consistent ability to do so, its solid dividend, and its rising revenue, AT&T edges out Verizon as the better buy for now.
