As the two largest U.S. carriers based on wireless subscriptions, Verizon Communications (VZ 0.24%) and AT&T (T 1.25%) are in an excellent position to benefit from the current growth in the U.S telecom market.
Customers are transitioning to faster, more powerful 5G wireless networks. This creates a multi-year opportunity for these companies to expand revenue as the U.S. market is forecast to reach $332.4 billion this year and $356.7 billion by 2028, up from $328.6 billion in 2022. Moreover, both companies' stock have drifted near 52-week lows, creating a potential buying opportunity.
But if you had to choose between these two telecom titans, which is the better investment? The answer isn't so straightforward. Let's take a look at each company to help you assess.
NYSE: VZ
Key Data Points
Verizon's pros and cons
On an earnings call in January, Verizon CEO Hans Vestberg said, "We expect that wireless mobility and nationwide broadband will be the most significant contributors to Verizon's growth for the next several years." The company's first-quarter results back up this expectation.
Q1 revenue for Verizon's wireless service business rose 3% year over year to $18.9 billion. This growth is important since wireless service sales comprised nearly 60% of Verizon's $32.9 billion in Q1 revenue.
In Verizon's broadband business, the company achieved 437,000 net additional broadband customers in Q1. This is the highest result in more than a decade, enabling Verizon to reach over 9 million total Q1 broadband connections.
That's not all. Verizon's dividend, yielding over 7% at the time of this writing, makes the telecom a compelling income investment. The company raised its dividend for the 16th consecutive year in 2022, and has paid dividends annually since 1984.
Bolstering the dividend is Verizon's Q1 free cash flow (FCF) of $2.3 billion, more than double 2022's $1 billion. This strong FCF outcome was helped by cost-cutting measures, including the shutdown of its aging 3G network at the end of the fourth quarter.
Yet investing in Verizon also comes with potential downsides. The company struggled to hold on to customers in its consumer segment, which represented 75% of Q1 revenue.
Verizon's consumer division suffered a Q1 net loss of 263,000 wireless postpaid phone customers. Postpaid clients are the telecom industry's most valuable customer segment. Verizon's business division fared better, with 136,000 postpaid phone net additions, but the final tally was a net loss of 127,000 total Q1 postpaid phone customers.
The case for AT&T
AT&T's biggest strength is its ability to capture postpaid phone customers. In Q1, postpaid phone net additions hit 424,000, the 11th consecutive quarter of more than 400,000 postpaid phone net adds. In fact, AT&T has consistently exceeded Verizon in terms of postpaid phone net adds.
| Quarter | AT&T Total Postpaid Phone Net Additions | Verizon Total Postpaid Phone Net Additions |
|---|---|---|
| Q1 2023 | 424,000 | (127,000) |
| Q4 2022 | 656,000 | 217,000 |
| Q3 2022 | 708,000 | 8,000 |
| Q2 2022 | 813,000 | 12,000 |
| Q1 2022 | 691,000 | (36,000) |
Data sources: AT&T, Verizon.
This customer growth helped AT&T increase mobile service revenue to $15.5 billion, the 11th straight quarter of rising service revenue.
AT&T's broadband business is also seeing growth through its fiber optic offering. The company has increased the number of fiber connections every quarter for the past five years, reaching 7.5 million fiber connections, and 13.7 million total broadband connections in Q1.
But the case for AT&T as an income investment is not as strong as Verizon's. That's because AT&T cut its dividend nearly in half last year as part of a spinoff of its WarnerMedia entertainment division. After five quarters, the dividend has yet to increase.
Moreover, AT&T's Q1 FCF came in at $1 billion, a substantial drop from the $2.8 billion in the prior year. Despite the decline, the company expressed confidence in reaching its 2023 FCF target of $16 billion or better.
NYSE: T
Key Data Points
Choosing between Verizon and AT&T
If you're considering Verizon and AT&T stock strictly as income investments, Verizon is the better choice, thanks to its long history of dividend increases, even amid the COVID-19 pandemic, and its strong FCF.
But Verizon's struggle to attract customers is concerning. Also, the company's Q1 revenue fell to $32.9 billion from the prior year's $33.6 billion. The drop was due to lower revenue from equipment sales and a decline in wired internet service in its business segment.
Meanwhile, AT&T's Q1 revenue rose to $30.1 billion from 2022's $29.7 billion. Its strong track record of customer acquisitions positions AT&T to continue growing revenue. The company forecasts wireless service sales to increase at least 4% in 2023 compared to Verizon's estimate of at least 2.5%.
AT&T's impressive customer growth allowed it to become the U.S. leader in wireless subscriptions with nearly a 46% market share compared to Verizon's 30%. And despite the dividend cut last year, AT&T still offers a robust dividend yield of over 7%. Consequently, these factors help to make AT&T the better telecom stock to invest in today.
