Third-quarter earnings reports are in, and AT&T (T 1.02%) and Verizon (VZ 1.17%) soared on their respective results. For the telecom giants, their years-long declines could finally be over.
AT&T hit a 30-year low earlier this year, but there's been a silver lining for investors in the sell-off. As these stocks have fallen, their dividend yields have gone up, and both offer yields between 7% and 8% today, making them among the best dividend payers on the market.
Though both stocks bounced off their recent lows following the earnings updates, it's not too late to buy them. But which one is the better buy? Let's take a look at how the two telecom giants stack up against each other today.
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AT&T vs. Verizon: Third-quarter results
One quarter's worth of results doesn't tell the whole story for any stock, but it does give you a snapshot of the business and where it's headed.
AT&T reported 1% revenue growth in its third quarter to $30.4 billion, with mobility service revenue up 3.7%. Adjusted operating income increased from $6.2 billion to $6.5 billion, and it showed solid growth in key metrics.
Postpaid phone net additions were up 468,000, and its postpaid phone-only churn, meaning the percentage of subscribers who leave the service, was down from 0.84% in the quarter a year ago to 0.79%.
Verizon, on the other hand, reported a 2.6% decline in revenue in its quarter to $33.4 billion, with service revenue up 2.9% to $19.3 billion, and its operating income fell 5% to $7.5 billion. The company reported postpaid phone net additions of 100,000 and churn of 0.9%.
Both companies raised their free cash flow guidance. AT&T now expects free cash flow of $16.5 billion, and Verizon sees free cash flow of $18 billion.
Advantage: AT&T. Both companies reported similar trends in the third quarter, but AT&T saw growth on the top and bottom lines, while Verizon did not. Additionally, AT&T's postpaid phone subscribers and churn were better than Verizon's. Declining equipment revenue remains a headwind for both companies.
AT&T vs. Verizon: Balance sheet
Part of the reason why AT&T and Verizon both look so cheap is because they are saddled with debt. AT&T carries $138 billion in debt on its balance sheet, including $11.3 billion that matures in less than a year, and it has $7.5 billion in cash.
Verizon, meanwhile, finished its quarter with $147.4 billion in debt, including $13 billion in debt due within the next year. It also has $4.2 billion in cash.
Verizon has significantly less goodwill on its balance sheet than AT&T, a relic of AT&T's acquisitions, which makes it less exposed to impairments.
Advantage: Even. Verizon's slightly larger debt should be expected as its business is larger. AT&T's goodwill balance is only a problem if the businesses associated with it falter.
AT&T vs. Verizon: Valuation and dividend
Most investors are buying these stocks because they are cheap and have high yields, so let's take a look and see how they compare.
AT&T currently trades at a price-to-earnings (P/E) ratio of just 6.2 and a dividend yield of 7.3%. Verizon goes for a P/E ratio of 7 and pays a dividend yield of 7.8%.
Keep in mind that both stocks are significantly more expensive on an enterprise-value basis, which factors in debt.
Advantage: Even. Verizon's slightly higher dividend yield makes up for its higher P/E ratio.
Which is the better buy?
Both companies seem to be on the mend, fixing earlier problems that had dogged them. For AT&T, that was its acquisition of DirecTV and Time Warner, which have since been spun off.
For Verizon, that means filling in gaps in its network from the shift to 5G as the company overinvested in millimeter wave technology that didn't give adequate coverage, though its roll-out of C-band spectrum in the third quarter seems to have helped resolve that issue.
The two telecoms are very similar, with nearly identical debt balances, growth rates, and valuations. However, AT&T has a slight advantage here, given its stronger performance in the third quarter and track record of postpaid net phone additions. Meanwhile, Verizon is still losing postpaid phone subscribers at the consumer level.
Dividend investors could easily choose to own both stocks, benefiting from diversification, but of the two, AT&T looks like the better buy today.
