Better Buy: AT&T vs. Verizon

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The competition between AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) has favored Verizon in recent years, as AT&T invested heavily in non-5G assets. Although AT&T made costly mistakes in its non-5G ventures, it has now worked to correct those errors.

The question now for investors is whether that makes AT&T stock a better choice than buying Verizon. Let’s take a closer look.

Where AT&T stands

AT&T has finally begun to address the poor performance of its non-5G investments. DirecTV cost AT&T $67.1 billion in cash and added debt back in 2015. Earlier this year, its spinoff valued the asset at just $16.25 billion. Also, while the spinoff of WarnerMedia nets AT&T $43 billion, investors may recall that AT&T purchased the former Time Warner for $109 billion.

To address these missteps, AT&T announced it would “adjust” its dividend expense to the $8 billion to $9 billion range. This is down from the previous $15 billion and ends AT&T’s Dividend Aristocrat status. AT&T had increased its dividend for 36 straight years before this adjustment.

An office worker stares at their smartphone while holding a coffee cup.

Image source: Getty Images.

Despite these painful decisions, the company has experienced some early successes. On the second-quarter 2021 earnings call, CEO John Stankey announced that fiber customers rate AT&T No. 1 in customer satisfaction. Moreover, churn in both postpaid phone and broadband dropped to record lows, and it posted its best numbers for net adds in more than a decade.

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Furthermore, AT&T reported revenue of $88 billion for the first two quarters of 2021, a 5% increase compared with the first six months of fiscal 2020. Net income for the period came to $9 billion. This amounts to a 55% increase over the same period. Interest expenses fell, and other income nearly tripled as the company reported a $2.8 billion actuarial gain in the first quarter.

These improvements could help AT&T address its debt, which stood at just under $180 billion as of the end of the second quarter. Considering that the stockholders’ equity (the company’s value after calculating assets minus liabilities) also stands at $180 billion, this obligation weighs heavily on the balance sheet.

Reducing debt could also help AT&T stock. It has lost about 5% of its value over the past 12 months. Even though a price-to-earnings (P/E) ratio of 18 compares well with historical levels, it appears high for a company that has failed to gain much traction on the earnings front.

The state of Verizon

Despite AT&T’s improvements, Verizon continues its focus on quality. It recently won the RootMetrics award for best overall network performance for the 15th year in a row. For the 26th consecutive time, it won JD Power’s No. 1 ranking for network quality.

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Perhaps more importantly, when comparing Verizon’s Q2 2021 earnings call to that of AT&T, the obvious difference is Verizon’s emphasis on a key driver of 5G growth — network as a service (NaaS). NaaS is a subscription-based service that can enable and connect AI, virtual reality, and Internet-of-Things (IoT) applications. This can power applications ranging from self-driving cars to distance learning to telemedicine.

To bolster this service, it spent $45 billion on C-Band spectrum early in the year, nearly twice what AT&T spent. Spectrum amounts to wireless “real estate,” allowing exclusive use of a frequency band that can support 5G-level wireless service.

Still, this spectrum purchase helped raise Verizon’s debt to $152 billion. While not as high as AT&T’s debt, Verizon’s $75 billion in equity makes this burden more of a strain.

Nonetheless, for the first two quarters of 2021, such functionality helped the company bring in over $66.6 billion in revenue, 7% more than in the first six months of 2020. Also, net income surged 24% during that period to $11.3 billion on slower growth in operating expenses, lower interest expense, and an increase in income from finance-related functions.

Moreover, while Verizon has not yet achieved Dividend Aristocrat status, it has hiked its payout every year since 2007. No sign has emerged that this will change. With a current yield of 4.5%, it will likely exceed the return of AT&T’s new dividend level.

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The dividend made up all of the returns as Verizon stock registered a 2% decline over the last 12 months. Nonetheless, with a P/E ratio of 11, it trades at a cheaper valuation than AT&T.

AT&T or Verizon?

Although AT&T’s surge in revenue and earnings growth should encourage investors, I believe Verizon is the choice between these telecom stocks. Thanks to its avoidance of costly missteps, Verizon has been able to keep up its dividend while trading at a lower valuation. Moreover, the potential for its NaaS revenue stream should help Verizon pay down its debt and boost its earnings growth over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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