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Better Buy: AT&T, Inc. vs. Verizon

By Dan Caplinger - Mar 23, 2016 at 5:35PM

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Which telecom giant is the smarter pick?

Image source: AT&T.

Many investors rely on telecom stocks to provide lucrative dividend income and stable growth, and both AT&T (T -0.66%) and Verizon (VZ -0.43%) have delivered both over the long run. However, with both stocks having gained substantial ground over the past year, some investors wonder whether recent pricing pressures for wireless plans could come back to haunt the two telecom giants. If so, would-be shareholders definitely want to know which would be the better buy of the two to protect against any risk.

Let's take a closer look at AT&T and Verizon, comparing them on a number of metrics to see which one looks more attractive under current conditions.

Both AT&T and Verizon have posted solid gains over the past 12 months, but AT&T has outpaced its rival. Verizon has posted a 13% total return since March 2015, compared to a strong 23% return for AT&T over the same period.

Stocks that enjoy large gains often become overvalued, so one fear investors might have about AT&T is that its stock price has outpaced its fundamental business strength. When you look at some simple valuation metrics based on trailing earnings, that hypothesis seems to play itself out. AT&T trades currently at about 16 times trailing earnings, compared to an earnings multiple of just 12 for Verizon. Yet when you start to look into the future, investors expect that AT&T's forward earnings will rise enough to reduce its earnings multiple, with current projections setting the bar at 13 times forward earnings. That matches Verizon's forward earnings multiple almost exactly. Therefore, it's tough to pick between AT&T and Verizon based on valuation alone.

Both Verizon and AT&T have been favorites among dividend investors for decades, and the telecoms traded like utility stocks for much of their histories before embracing the growth available in the mobile communications segment. AT&T currently has a higher yield of about 5%, compared to 4.25% for Verizon.

A couple of additional factors provide some useful information. AT&T's payout ratio based on earnings is higher than Verizon's by a substantial margin of roughly 80% to 50%, but some would conclude that was due to the same factors that led the disparity in AT&T's trailing versus forward valuation. AT&T also has a longer consecutive streak of raising its dividend on an annual basis, and its 32-year track record makes it a Dividend Aristocrat; Verizon currently has just an 11-year streak.

On the whole, AT&T seems to have an edge over Verizon in dividends, but it's a small one that many investors might find insignificant.

Both Verizon and AT&T have had to face tougher conditions in the telecom industry lately, but they both still present compelling growth prospects. In AT&T's full-year 2015 results, the company managed to boost revenue by about 11%, and adjusted earnings per share were up 6% from 2014. For the fourth quarter, AT&T sported 2.8 million new wireless customers, and although business solutions revenue was down slightly, favorable downward trends in churn rates among mobile customers helped power the telecom's results. With the acquisition of DirecTV under its belt, AT&T projects double-digit percentage revenue growth for 2016, with mid-single digit percentage gains in adjusted earnings per share and continuing growth in free cash flow.

Verizon's results showed similar trends. Adjusted earnings per share jumped 19% for the full 2015 year, and the company celebrated the impact of spending roughly $28 billion on capital expenditures designed to broaden its available wireless spectrum and build up future network capacity. Over the year, Verizon brought on 4.5 million retail postpaid wireless customers, and it tried to tout its quality advantages over smaller rivals to keep up its business momentum. However, Verizon's forward guidance wasn't as strong as AT&T's, as the company admitted it was unlikely to do better than remain at its 2015 level for adjusted earnings in 2016.

AT&T and Verizon have a lot in common, and it's tough to pick a winner based on these factors. Based on its greater opportunities for improvement, AT&T looks like a slightly better pick at this moment, but in the long run, both it and Verizon will succeed or fail based on their abilities to fend off new competition and retain their joint stranglehold over the industry.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$21.17 (-0.66%) $0.14
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$51.42 (-0.43%) $0.22

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