Better Telecom Stock: AT&T vs. Verizon

Telecom companies are on a level with utilities in the eyes of most consumers these days. People generally pay their smartphone bills with as much regularity as they do their water, electricity, and gas bills. A smartphone with a data plan has become a necessity.

Because they are now a necessity to so many, AT&T (T -0.76%) and Verizon Communications (VZ -1.50%), the two largest wireless carriers in the United States, are likely familiar to most consumers. And the two stocks are definitely familiar to most investors. Their stocks have gained some popularity with retirees and income-focused investors because of the large dividend each company pays its shareholder base.

With these high-yielders both trading near 52-week lows, now might be a good time for investors to dial in on which stock is the better deal. Investors should look at each company's core business, their dividends, and the growth each company offers at their respective valuations. Let's find out which is the better telecom stock.

Round one: Who's winning the battle for customers?

A trio of carriers -- AT&T, Verizon, and T-Mobile -- dominates the telecom industry in America. AT&T and Verizon are the two largest, with roughly 75% market share between them. But while outside competitors have failed to establish themselves, these three companies battle fiercely for a share of a very saturated U.S. market where most adults (and many children) already have a smartphone plan.

So, who is winning? Investors should look at both customer count and revenue for these wireless businesses. AT&T had 112 million connected retail wireless devices as of the first quarter, up 23% from the same quarter in 2022. Verizon ended Q1 with 114.5 million, down slightly from 115.2 million the prior year. AT&T has done an excellent job acquiring new business.

AT&T also has a leg up in wireless revenue growth, which increased by 5.2% year over year in Q1 versus 3% for Verizon. One quarter doesn't tell a big story, but knowing AT&T is piling up customers, investors should see what happens in future quarters. AT&T may not always outperform Verizon. However, most people likely pick carriers based on price and network quality, so AT&T's clear advantage is notable.

Advantage: AT&T

Round two: Which dividend reigns supreme?

Regarding the dividend, both stocks offer ultra-high-yield dividends. Investors can lock in yields of approximately 7% from both stocks at today's share price. But a dividend is only worth anything if it's paid, so investors should pay attention to each company's financials.

AT&T underwent significant changes in the last year, cutting its dividend and shedding its entertainment business. The dividend now costs about $2 billion each quarter ($8 billion annually). Management has reiterated that the company will generate $16 billion or better in free cash flow this year, which pegs the dividend payout ratio at 50%.

Verizon spends $2.75 billion quarterly on its dividend ($11 billion annual total). Management didn't explicitly guide for 2023 free cash flow, but we can do some math. Verizon has generated $38.6 billion in operating cash flow over the past four quarters. Assuming Verizon at least meets that figure in 2023, you can subtract management's guided capital investments of $19.25 billion for 2023 to end up with around $19 billion in free cash flow. Based on this, Verizon's payout ratio should be around 58%.

So who wins? Each stock offers similar dividend yields and is on a similarly equal footing with funding the payout. Investors could probably own both for the dividend and sleep well at night. But Verizon gets a slight edge since it has a slightly cleaner balance sheet, leveraged to 2.7 times adjusted EBITDA versus 3.2 times for AT&T.

Advantage: Verizon

Round three: Which stock offers better value?

AT&T and Verizon are very similar companies, so this last part comes down to value -- what price am I paying for the growth I'm getting?

Image source: Chart created by the author.

The market is putting a premium on Verizon versus AT&T. The stock's price-to-earnings ratio (P/E) is lower despite roughly the same earnings growth estimates moving forward. This could be due to Verizon having a stronger balance sheet.

This is pretty cut and dried. Assuming both companies perform to expectations, AT&T is the cheaper stock, once you factor in each company's expected growth.

Advantage: AT&T

And the winner is...

AT&T takes two categories decisively and loses the dividend battle by a slim margin. AT&T is probably the stock worth considering when looking for a high-yield telecom stock to add to your dividend portfolio.

I'm not saying Verizon is necessarily a bad stock or one people should go out of their way to avoid. Still, AT&T's recent success in adding customers, which could help juice revenue growth over time, more than makes up for a balance sheet that isn't great but not so bad that it's a deal breaker.