Comparing Outstanding Telecommunications Shares: AT&T Outperforms Verizon
Comparing Outstanding Telecommunications Shares: AT&T Outperforms Verizon
Shares of AT&T (T, decreasing by 0.73%) and Verizon Communications (VZ, decreasing by 0.90%) have experienced a revival in 2024, bouncing back from their 52-week lows of $15.46 and $35.40, respectively, which they hit in November of the previous year. As of November 11, 2024, the value of AT&T's shares has increased by more than 30%, while Verizon's has seen a rise of about 7%.
Both companies provide attractive dividends. Currently, AT&T's forward dividend yield is approximately 5%, while Verizon boasts a yield of over 6%.
The improved performance of both stocks compared to the previous year, coupled with their strong potential as sources of passive income, raises the question: which telecom titan makes a better long-term investment at this point in time? However, the answer is not as straightforward as merely picking the stock with the higher dividend yield.
Focus on Core Businesses
Both AT&T and Verizon have prioritized growing their mobile wireless and fiber optic internet businesses. Customers who purchase both services from the same provider are less likely to switch to a competitor, making these services vital.
In the third quarter of the year, AT&T's mobile wireless service revenue increased by 4% year over year to $16.5 billion. Verizon's mobile wireless service revenue also saw growth, rising by 3% year over year to $19.8 billion during the same period. Both companies are successful in expanding their mobile service revenue, which is their primary income source.
Regarding fiber optic sales, AT&T achieved a notable 17% year-over-year increase during the third quarter, resulting in $1.9 billion in revenue. Verizon's Fios-branded fiber service generated $2.9 billion in the third quarter, which is relatively flat compared to the previous year.
However, Verizon's fiber optic sales appear to be stagnant. In September, Verizon announced its intention to acquire Frontier Communications Parent, a company that provides fiber internet service across 25 states and generated $1.5 billion in Q3 sales, representing a 4% increase year over year.
Debt and Its Consequences
The Frontier acquisition is expected to increase Verizon's fiber optic revenue, but the deal comes with drawbacks. Frontier ended the third quarter with more than $11 billion in debt.
Both AT&T and Verizon carry substantial debt loads – $129 billion for AT&T and over $150 billion for Verizon, as of the end of the third quarter. This is a crucial factor when evaluating investment possibilities for these telecom companies, as excessive debt could impact dividend payments.
AT&T has kept its quarterly payouts constant since its last increase in 2019, choosing instead to focus on reducing debt and making capital expenditures to expand its 5G wireless and fiber optic networks. On the other hand, Verizon has provided investors with 18 consecutive years of annual dividend increases.
A vital metric for assessing a company's ability to reduce debt, invest in its business, and pay dividends is free cash flow (FCF). Through the first three quarters of 2024, AT&T's FCF reached $12.8 billion, compared to $10.4 billion in the previous year. Verizon's year-to-date FCF was $14.5 billion, marginally lower than the $14.6 billion recorded in the same period of the previous year.
Both telecoms consistently produce strong FCF, signaling their ability to address the needs of their businesses.
Investment Decisions - Weighing the Pros and Cons
Although Verizon has produced more FCF than AT&T so far this year, AT&T's impressive year-over-year FCF growth is an optimistic sign. AT&T's financially responsible approach, choosing to defer dividend hikes in favor of debt reduction and business expansion efforts, is setting the company up for long-term success.
AT&T is working to bring its net debt-to-adjusted EBITDA ratio down to a reasonable 2.5. Management anticipates reaching this target in the first half of 2025. Once AT&T achieves its debt ratio goal, it may once again consider increasing its dividend. Prior to halting its hikes, AT&T had a streak of 36 consecutive years of dividend increases.
Verizon's Frontier acquisition will add to its debt load. Moreover, Frontier recorded an FCF loss of $81 million in Q3. These factors could challenge Verizon's ability to continue increasing its dividend.
Considering the advantages and disadvantages of each company, it is challenging to choose between them as investment options. Verizon's high dividend yield and its track record of payout hikes make it an appealing investment option. However, its Frontier acquisition introduces risks to its future financial stability.
AT&T's core businesses and financial health are improving, and its long-term prospects are promising. Given these factors, AT&T may be the better telecom stock to purchase now for long-term investment potential.
After considering the financial performance and future prospects of both AT&T and Verizon, individuals interested in investing in telecommunications companies might want to closely examine their financial strategies. For instance, AT&T's focus on reducing debt and investing in its 5G wireless and fiber optic networks could set it up for long-term success, potentially leading to future dividend increases. on the other hand, Verizon's acquisition of Frontier Communications could potentially boost its fiber optic revenue but possibly increase its debt and impact its ability to maintain its dividend hikes. Overall, the decision to invest in either company depends on an investor's risk tolerance and investment goals regarding finance, money, and investing.