This year looks to be the one to invest in AT&T (T 1.02%) and Verizon Communications (VZ 1.17%). Both of these giants of the telecom industry experienced share-price gains going into 2024. Verizon even hit a 52-week high of $43.21 at the end of January.
The pair also sport attractive dividend yields over 6% at the time of this writing. And both experienced a dip in stock price recently, so now seems like a good time to buy shares in these telecom titans.
But if you could choose only one to invest in, which would it be? The answer isn't straightforward and requires looking into both companies in more detail. This can help you assess which is the better investment right now.
AT&T's pros and cons
AT&T spent the last few years transforming its business, divesting entertainment assets such as its Warner Media operations. So 2023 was the first full year that AT&T operated strictly as a telecommunications company. And it was a solid year for the telecom stalwart.
The company's mobile-wireless business saw revenue grow by 2.7% year over year, contributing $84 billion of AT&T's $122.4 billion in 2023 sales. Meanwhile, its broadband revenue experienced excellent 8% growth over 2022, reaching $10.5 billion.
These year-over-year sales gains led to AT&T's free cash flow (FCF) increasing to $16.8 billion in 2023, up from $14.1 billion in 2022. FCF provides insight into a company's cash available for activities such as investing in its business, funding its dividend, and paying down debt.
AT&T's debt is one area weighing on the company's stock. Exiting 2023, AT&T's net debt was a massive $128.9 billion. That means a portion of the company's FCF will be tied up for a while to pay down this debt.
Yet a positive sign is AT&T targeting a net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio in the 2.5 range some time in the first half of next year. Hitting this goal would bring its debt burden down to a more manageable level.
The case for Verizon
Verizon also has amassed a substantial debt load. At the end of 2023, its net debt was $126.4 billion. But unlike AT&T, Verizon's net debt-to-adjusted EBITDA ratio is already at 2.6, so Verizon is ahead of its rival in getting its debt under control.
However, Verizon has struggled to capture customers in the postpaid phone-subscriber segment, losing out to AT&T throughout 2023. Postpaid subscribers are the most valued customer segment in the telecom industry.
CHART BY AUTHOR.
On the bright side, Verizon managed to recoup its postpaid phone-customer losses in the fourth quarter, providing the company with some momentum as it entered 2024.
In addition, Verizon's free cash flow reached $18.7 billion in 2023, substantially higher than AT&T's $16.8 billion. Verizon's superior FCF puts it in a stronger position than AT&T to continue reducing debt and maintain its dividend.
Verizon's FCF increase is thanks in part to growth in its wireless-service sales, which hit $76.7 billion in 2023, a year-over-year increase of 3.2%. This income is key since it comprised the majority of the company's $134 billion in 2023 revenue.
Deciding between AT&T and Verizon
Both AT&T and Verizon possess qualities that make them compelling investments. The former's success capturing customers in the key postpaid phone-subscriber segment is a strength, while Verizon's superior FCF means a more financially secure dividend.
And on that note, although both offer similar dividend yields, Verizon has raised its dividend for 17 consecutive years. Meanwhile, AT&T has not raised its dividend since cutting it in 2022 as part of its divestiture of entertainment assets.
Moreover, Verizon's 2023 sales of $134 billion eclipsed AT&T's $122.4 billion, enabling higher FCF, which contributed to Verizon's ability to raise its dividend. Verizon also closed out 2023 with an impressive improvement in postpaid phone subscribers during the fourth quarter.
Given these factors, right now Verizon looks like the superior long-term investment between these two telecom titans, especially for passive income.
