AT&T, Verizon, or T-Mobile: Which Telecom Stock Should You Buy After Earnings?

There are few services more essential for many Americans than their wireless phone service.

We live in a constantly connected world, and having access to a fast and reliable internet connection in your pocket is essential for modern life. That positions the three dominant wireless carriers in the United States to profit for years to come. Their scale and the costs of building a wireless network will make it difficult for any new competitor to come in and compete.

So investors looking to own a piece of the U.S. wireless industry will have to choose between AT&T (T 1.02%), T-Mobile (TMUS -0.06%), and Verizon Communications (VZ 1.17%). Let's take a look at their most recent earnings results and their outlooks to determine which is most deserving of your investment.

All about free cash flow

At an investor conference earlier this year, T-Mobile CFO Peter Osvaldik said his biggest financial focus at the wireless carrier is converting service revenue into free cash flow. Indeed, free cash flow is a major focus across the industry, as it supports the mammoth capital returns each company offers shareholders.

Here's how free cash flow at T-Mobile, Verizon, and AT&T stacked up through the first three quarters of 2023.

Data sources: Company earnings reports. YOY = Year over year.

All three saw big improvements in free cash flow last quarter and raised their guidance. AT&T raised its full-year free cash flow guidance from $16 billion to $16.5 billion, giving investors much more confidence in its ability to meet its target. Verizon upped its guidance by $1 billion for the full year to total over $18 billion. T-Mobile made just a small adjustment to its free cash flow guidance, increasing the bottom end of its range from $13.2 billion to $13.4 billion, but maintaining the top end at $13.6 billion.

T-Mobile has a lot of growth still to come, as evidenced by its 94% improvement in free cash flow last quarter. Management thinks it can generate $16 billion to $18 billion in free cash flow next year, and it's backed that up with a big capital return program.

The big debt question

While all three companies produce a ton of free cash flow, how they put that cash to use is of prime importance for investors.

AT&T and Verizon's high debt loads are dragging on their results. As of the end of the third quarter, AT&T had $138 billion in debt on its books and Verizon had $122.2 billion. T-Mobile, by comparison, had just $77.9 billion in debt on its balance sheet.

That makes T-Mobile's debt position much more manageable. It has just $3.4 billion in debt obligations due over the next 12 months and another $1.3 billion in financing lease liabilities. AT&T has $11.3 billion in debt maturing in the next 12 months, and Verizon has $12.95 billion.

The reason short-term debt obligations are such a big deal right now is that interest rates have climbed substantially over the past two years. If AT&T and Verizon refinance their debt, they'll have to pay much more to service that debt going forward. As such, they're working to pay down debt as much as possible. That means a substantial portion of free cash flow will go toward that purpose rather than being returned to shareholders.

Meanwhile, T-Mobile is free to use the bulk of its free cash flow to buy back shares, boost its dividend, or make acquisitions.

Is T-Mobile too expensive?

While T-Mobile is growing quickly and has a lot of advantages over AT&T and Verizon, its stock is definitely more expensive than the two competitors. That might make a buying decision difficult for investors.

If you look at these companies' outlooks for 2023, T-Mobile trades at a premium relative to its free cash flow.

Data source: Company earnings reports and Yahoo! Finance.

But with the potential to grow free cash flow much faster in 2024 and beyond, T-Mobile should command a premium. And with a smaller debt burden hanging over it, T-Mobile has a lot more flexibility with its free cash flow, adding further to its advantages. As such, I think T-Mobile's stock is fairly priced and offers investors the best performer in the wireless industry. That makes it a better buy than AT&T or Verizon.