Better Buy: AT&T vs. Verizon Stock

AT&T (T -0.12%) and Verizon (VZ 0.54%) are two titans of the telecommunications industry, and each company’s respective shares have long been vehicles of choice for income-oriented investors. Which of these dividend-paying telecommunications stocks is the best buy at today’s prices? Read on to see why two Motley Fool contributors have different perspectives on which company looks like the better investment.

Image source: Getty Images.

Back to basics

George Budwell: Telecom giant AT&T is a company in transition. Over the past two years, AT&T spun off its DirecTV and WarnerMedia media assets and then returned to its telecommunications roots by investing heavily in 5G wireless and fiber networks.

The transition has not been easy for shareholders. Due to lost revenue from its media business, renewed focus on deleveraging its debt-laden balance sheet, and continued efforts to expand 5G wireless and fiber coverage, AT&T had to cut its dividend. highly coveted. Even so, AT&T stock is still yielding a healthy return of 6.6% on an annualized basis.

However, AT&T’s high dividend yield isn’t the only reason to consider buying its stock. Thanks to the ongoing bear market and a recent increase in late customer payments, AT&T shares have fallen almost 10% since the start of 2022. As a direct result, shares of the telecom giant are currently trading near an all-time low from a price-earnings ratio perspective. In other words, investors have likely overdone the bearish sentiment towards this top telecom stock. After all, AT&T’s return to its core telecommunications business paid off in terms of winning new customers, increasing its share of this huge market.

So unlike times past when AT&T was essentially a pure-play income stock, the telecom giant’s stock is also now a very attractive value play. Wall Street, in fact, thinks AT&T shares are currently 48% undervalued. So AT&T stock could be one of the best deals in the telecom sector right now.

Verizon has kept a tighter strategy in recent years

Keith Noonan: Instead of pursuing expensive media acquisitions and other big growth bets outside of its core competencies, Verizon has focused much more on building its wireless services over the past five years. It turned out to be a smart move, and it gave the company more headroom to invest in wireless band spectrum and other infrastructure critical to its 5G strategy.

Verizon improved the coverage area, speed and reliability of its 5G network, and Root Metrics ranked the company as the most reliable 5G provider in the first half of this year. The stock is now trading down around 21% year-to-date, and the big sell-offs have had the effect of pushing its price-to-earnings ratio and dividend yield to very attractive levels.

Chart showing Verizon's PE ratio falling and dividend yield rising in 2022.

VZ PE Ratio (forward) data by YCharts

Verizon already has 15 straight years of annual dividend growth under its belt, and strong free cash flow generation, even as it invests heavily in building out its next-generation network technologies, suggests investors can expect to continued increases in payments. The company’s large investments in C-band wireless spectrum and other 5G resources are expected to start paying off after hurting near-term profitability, and the market may underestimate telecommunications opportunities in fiber and fixed wireless Internet.

I used to have high hopes in AT&T’s media strategy, and I’m still in a small position at the company after the spin-off from Discovery of Warner Bros., but I think the ordeal of fusion ultimately caused it to miss a few steps in the 5G race. While I’m not surprised to see AT&T rebound from current price levels, I think Verizon has a better position in next-gen networking technology and is currently standing as the best buy.

Which high-yield telecom stock is the best buy?

AT&T stock still looks cheaper than Verizon by some valuation metrics, and it offers a higher yield even after its substantial dividend cut. On the other hand, Verizon’s business looks stronger thanks to management’s decision not to stray too far from the company’s core telecommunications offerings.

For investors looking for high-yield stocks or who want diversified exposure to the telecommunications sector, it might make sense to invest in both AT&T and Verizon. Otherwise, investors should weigh AT&T’s more downgraded valuation and higher yield against Verizon’s more promising business position to determine which portfolio is best suited.

George Budwell has no position in the stocks mentioned. Keith Noonan holds positions at AT&T and Warner Bros. Discovery, Inc. The Motley Fool recommends Verizon Communications and Warner Bros. Discovery, Inc. The Motley Fool has a Disclosure Policy.

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