AT&T (T 1.88%) and Verizon (VZ -0.53%) are two titans of the telecommunications industry, and each company's respective stocks have long been go-to vehicles for income-focused investors. Which of these dividend-paying telecom stocks is the better buy at today's prices? Read on to see why two Motley Fool contributors have different perspectives on which company looks like the better investment.
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Back to basics
George Budwell: Telecom giant AT&T is a company in transition. Over the past two years, AT&T has parted ways with its media assets DirecTV and WarnerMedia and subsequently returned to its telecom roots by investing heavily in 5G wireless and fiber networks.
The transition hasn't been easy for shareholders. As a result of the loss of revenue from its media business, a renewed focus on deleveraging its debt-laden balance sheet, and its ongoing effort to ramp up 5G wireless and fiber coverage, AT&T has had to slash its highly coveted dividend. Even so, AT&T stock still pays out a healthy 6.6% yield on an annualized basis.
However, AT&T's elevated dividend yield isn't the only reason to consider buying its stock. Thanks to the ongoing bear market and a recent uptick in late payments by customers, AT&T's shares have fallen by nearly 10% year to date in 2022. As a direct result, the telecom behemoth's shares are currently trading near an all-time low from a price-to-earnings ratio perspective. In other words, investors have probably gone overboard on the bearish sentiment toward this top telecom equity. After all, AT&T's pivot back to its core telecom business has been paying dividends in terms of gaining new customers, thereby driving up its share of this massive market.
So, unlike in past times where AT&T was essentially a pure-play income stock, the telecom giant's shares are also now a highly attractive value play. Wall Street, in fact, thinks AT&T's shares are currently undervalued by a whopping 48%. Thus, AT&T stock might be one of the best bargain buys in telecom right now.
Verizon has kept a tighter strategy in recent years
Keith Noonan: Instead of chasing costly media acquisitions and other big growth bets outside of its core competencies, Verizon has kept a much tighter focus on building out its wireless services over the last half-decade. That's proven to be a smart move, and it's given the company more room to invest in wireless band spectrum and other infrastructure central to its 5G strategy.
Verizon has been improving the coverage area, speed, and reliability of its 5G network, and Root Metrics ranked the company as the most reliable 5G provider in this year's first half. The stock now trades down roughly 21% year to date, and the big sell-offs have had the effect of pushing its price-to-earnings ratio and dividend yield to very attractive levels.
VZ PE Ratio (Forward) data by YCharts
Verizon already has 15 years of consecutive annual dividend growth under its belt, and strong free cash flow generation even as it makes big investments to build out its next-generation network technologies suggests that investors can look forward to continued payout hikes. The company's big investments in C-band wireless spectrum and other 5G resources should start to pay off after hurting profitability in the near term, and the market may be underestimating the telecom's opportunities in fiber and fixed-wireless internet.
I previously had high hopes for AT&T's media strategy, and still own a small position in the company following the spinoff of Warner Bros. Discovery, but I think the merger ordeal ultimately caused it to miss some steps in the 5G race. While I wouldn't be surprised to see AT&T bounce back from today's pricing levels, I think Verizon has better positioning in the next-gen network technology and currently stands as the better buy.
Which high-yield telecom stock is the better buy?
AT&T stock looks even cheaper than Verizon by some valuation metrics, and it offers a bigger yield even after its substantial dividend cut. On the other hand, Verizon's business looks stronger thanks to management's decision not to stray too far from the company's core telecom offerings.
For investors seeking high-yield stocks or who are interested in having diversified exposure to the telecommunications sector, it could make sense to invest in both AT&T and Verizon. Otherwise, investors should weigh AT&T's more beaten-down valuation and higher yield against Verizon's more promising business footing to determine which is the better portfolio fit.
