Telecom giants AT&T (T 1.10%) and Verizon Communications (VZ 0.90%) are staples for many passive income investors, and for good reason. Both companies have a rich tradition of returning an outsize portion of their free cash flow to shareholders via regular quarterly payouts.
To wit: AT&T stock presently sports a rather generous 6.8% annualized dividend yield, while Verizon's dividend yield clocks in even higher at 7.2%. So which of these blue chip dividend stocks is the better stock to own right now? Read on to find out.
A more reliable choice
Jeremy Bowman (Verizon): AT&T and Verizon have both been stock market losers in recent years. The two telecom giants have lost market share to T-Mobile US and have struggled to grow.
Both stocks offer appealing dividend yields, but if you're choosing between the two, Verizon is more deserving of your money.
First, it has avoided many of the mistakes AT&T has made in recent years. AT&T has made two of the worst acquisitions of the 21st century: DirecTV, which happened when the cord-cutting trend was already obvious; and its more recent purchase of Time Warner, which it was forced to spin off at a deep discount after its vertical integration hopes flopped again. AT&T's current CEO, John Stankey, ran the WarnerMedia division when it was under AT&T's control.
The WarnerMedia debacle also led AT&T to slash its dividend, making Verizon the more reliable dividend payer of the two.
Both companies have elevated debt levels, but AT&T's is a result of botched acquisitions rather than investing in its business like Verizon has. Verizon has the better dividend yield of the two, coming in at 7.2% compared to 6.8%.
Finally, Verizon has the most coverage in the country, thanks to spending on spectrum that gives it exclusive access to the most valuable frequencies in a certain area. It also has a reputation for leading network quality in the industry.
While AT&T and Verizon both face the same macroeconomic challenges, Verizon looks like the better pick of the two based on its track record of better capital allocation, a more reliable and higher-yielding dividend, and better network coverage.
A more attractive opportunity
George Budwell (AT&T): While it is indeed true that AT&T's misadventure into entertainment during the prior decade was a poor choice for both its balance sheet and long-term outlook, the telecom behemoth's recent course correction arguably isn't being appreciated by investors, either.
For example, AT&T's stock is presently being valued at an incredible 15.8% forward-looking earnings yield, making its stock very cheap relative to a risk-free asset like the 10-year U.S. Treasury note. For comparative purposes, Verizon's shares are currently trading at a 13.1% forward-looking earnings yield, which is also ridiculously cheap, to be fair.
The headline here is that investors have gotten overly bearish on AT&T stock due to the meteoric rise of T-Mobile over the past few years, its ill-advised venture into entertainment via the acquisitions of DirecTV and Time Warner, and the threat of smaller, novel competitors entering the fluid telecom space.
However, the most important part of the telecom's giant's story, which has so far failed to land with investors, is its pivot back to familiar ground through its heavy investment in both 5G wireless and fiber across the United States.
So, AT&T or Verizon?
The big picture is that AT&T has the scale, infrastructure, and operational know-how to easily maintain its top three status within the U.S. wireless carrier space for the foreseeable future. Over time, this favorable competitive positioning ought to allow AT&T to deleverage its balance sheet, continue to pay a top-notch dividend, and slowly regain the confidence of the broader markets. So while Verizon does offer a better near-term outlook, the market's irrational take on AT&T's long-term prospects gives it the edge in terms of deep value.
