Both telecom titans offer robust dividends, but one edges out its rival as the superior investment.
The high-yield dividends offered by AT&T (T 1.13%) and Verizon Communications (VZ 0.83%) are a compelling reason to consider shares in these telecom giants today. Both offer impressive yields standing at over 6%. Contrast this to the S&P 500's long-term dividend yield of 1.8%.
These two companies also generate reliable revenue, since mobile phone and internet services are essential in today's connected world. This makes their dividends resilient. For instance, both maintained quarterly payments during the height of the COVID-19 pandemic when other firms were forced to eliminate dividends.
Although AT&T and Verizon both possess appealing traits, one of them edges out its competitor as a superior stock to buy. But determining which one is not necessarily straightforward. Here's a look at each, and why one makes a better investment for the long haul.
Factors to consider with AT&T
AT&T has consistently proven capable of capturing customers since CEO John Stankey took over the top spot in 2020. Since then, the company has achieved 15 straight quarters of net additions in its postpaid phone subscribers, the telecom industry's most valuable customer segment.
AT&T is also steadily expanding its fiber optic internet service. Under Mr. Stankey's tenure, the firm increased its fiber broadband connections from 4.7 million in 2020 to 8.6 million through the end of this year's first quarter.
Despite the customer growth, AT&T's Q1 revenue of $30 billion was down from the prior year's $30.1 billion. Lower equipment sales contributed to the decline, dropping from $5.1 billion in the first quarter of 2023 to $4.6 billion this year.
Equipment revenue can vary based on many factors -- for example, when Apple launches a new iPhone. That's why a good indicator of AT&T's business growth is to look at its wireless service revenue. Here, the company saw a 3.3% year-over-year increase to $16 billion.
AT&T also generated free cash flow (FCF) of $3.1 billion in Q1, up by 2.1 billion over the previous year. FCF is key to the company's ability to perform actions such as invest in its business and fund its dividend.
Verizon's pros and cons
Verizon kicked off 2024 with Q1 wireless service sales rising 3.3% year over year to $19.5 billion. The growth was helped by a price increase the company implemented in 2023. This enabled Verizon to reach $33 billion in total Q1 revenue, 10% more than AT&T.
Verizon also generated Q1 FCF of $2.7 billion, up from the prior year's $2.3 billion. Its ability to produce consistently strong FCF allowed the company to raise its dividend for the 17th consecutive year last fall. This is the longest streak in the U.S. telecom industry, according to Verizon.
The firm is also finding success expanding its broadband business. Internet customers rose by 18% over the past year to reach more than 11 million subscribers in Q1. But unlike AT&T's streak of postpaid phone net additions, Verizon suffered a Q1 net loss of 68,000 in this area. However, this is a fairly typical seasonal pattern for the telecom behemoth.
The company usually sees a surge of new postpaid customers in Q4 thanks to holiday promotions, only to lose some subscribers in Q1. Accounting for this seasonal pattern, Verizon's Q1 postpaid phone net loss marks its strongest first-quarter performance in its consumer division since 2018.
Choosing between AT&T and Verizon
Deciding between AT&T and Verizon can be challenging because each possesses different strengths and weaknesses. AT&T is able to consistently grow its key customer base, but Verizon generates more revenue, and offers a longer streak of dividend increases.
AT&T, on the other hand, cut its dividend by nearly 50% in 2022 after divesting entertainment assets. Since then, the company has not raised its dividend.
Another consideration is valuation. AT&T possesses a lower price-to-earnings ratio (P/E ratio) of 9, versus 14.5 for Verizon. This indicates AT&T's stock is attractively priced compared to its rival.
In addition, the consensus among Wall Street analysts is an overweight rating for AT&T stock, with a median share price target of $20. Verizon also received an overweight rating, with a median share price target of $45.50, suggesting both stocks have some upside.
But one factor tips the scale in Verizon's favor as the better telecom stock. AT&T and Verizon are primarily income investments. They're not considered growth stocks. In this context, Verizon is the better investment choice. The company's long history of dividend increases, coupled with dependable FCF, makes Verizon superior to AT&T as a source for passive income.
Robert Izquierdo has positions in AT&T, Apple, and Verizon Communications. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
