Better Buy: AT&T Inc. vs. T-Mobile US Inc.

By Brian Stoffel Markets Fool.com

For most of its history, investing in telecom companies was a pretty straightforward process. Huge barriers to entry and a certain level of government regulation protected these giants. Investors could count on a reliable flow of cash to fund big dividends.

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But in today's matchup of AT&T (NYSE: T) versus T-Mobile (NASDAQ: TMUS), we have something of an anomaly. AT&T is much closer to the traditional telecoms that we envision, while T-Mobile has been able to post remarkable growth rates over the last five years, while refusing to pay out a dividend for the time being.

Image source: Getty Images.

So which company's stock is a better buy at today's prices? That's a tough question to answer, especially because these two take such different approaches to the market. But below are three different lenses to view the question. Hopefully, they'll give you a better idea of where to put your cash.

Financial fortitude

Dividend investors love seeing cash returned to them. But there's something to be said for keeping a comfortable cash stash on hand. That's because every company, at one point or another, will face difficult economic times. Whether those forces are company-specific or macro in nature, those that approach the future with cash on hand will have options. They can outspend rivals, buy back shares on the cheap, or even make acquisitions.

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Debt-laden companies are in the exact opposite boat, more vulnerable by their decisions to use leverage, and at the whim of creditors in such situations.

Here's how AT&T and T-Mobile stack up in terms of financial fortitude.

Company

Cash

Debt

Net Income

Free Cash Flow

AT&T

$7.6 billion

$117 billion

$14.5 billion

$17.2 billion

T-Mobile

$6.2 billion

$22 billion

$1.4 billion

$1.5 billion

Data source: Yahoo! Finance

These balance sheet numbers aren't particularly expensive, but that's the nature of telecoms; they have to invest huge amounts of money up front to build out their infrastructures, but then can enjoy copious free cash flows down the road. These two are no exception.

Keeping in mind that AT&T is valued at five times the size of T-Mobile, the latter has a much healthier balance sheet -- and heftier cushion on hand. On the other hand, AT&T's free cash flow dwarfs that of T-Mobile, even after factoring in their difference in size.

In the end, however, I have to side with T-Mobile. Over the past 12 months, AT&T has had to make over $33 billion in payments on its long-term debt. For the time being, that's sustainable. But I'm not sure what would happen should something unexpectedly severe occur to the company. T-Mobile, on the other hand, paid $1.13 billion in the same payments -- a gap that is still enormous after accounting for the difference in size between these two companies.

Winner = T-Mobile

Sustainable competitive advantages

If I could go back and start my investing career over again, I would spend almost all my time investigating this one variable. A company's sustainable competitive advantage -- often referred to as its "moat" -- has been the single greatest determining factor in my own investing returns.

At its core, a company's moat is what differentiates it from the pack, makes it special, and keeps customers coming back for more -- year after year, decade after decade.

Both companies benefit from extremely high barriers to entry -- as not just anyone can come in and spend billions on the latest 4G network. But those moats disappear when we start comparing within the industry.

AT&T's moat comes from its network, the ubiquity of its brand, and -- perhaps most importantly -- its dominant market share. T-Mobile, on the other hand, is a newcomer. It has rapidly gained market share over the past five years as it was the first major carrier to go with no-contract plans. As you can see, that paid off.

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Data source: Statista.

But here's the thing about those gains: They've come based on a strategy that was very effective but easily replicable. Already, AT&T and other industry giants are beginning to offer the same things.

Additionally, AT&T is branching out and becoming much more than just a telecom. The acquisition of DirecTV and Time Warner Cable are indicative of this shift. T-Mobile simply doesn't have the resources to make such splashy moves, and this definitely gives AT&T the upper hand.

Winner = AT&T

Valuation

Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Company

P/E

P/FCF

PEG Ratio

Dividend

FCF Payout

AT&T

15

15

1.8

4.7%

68%

T-Mobile

38

33

0.8

N/A

N/A

Data source: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.

This might be the most interesting comparison of them all. T-Mobile is demonstrably more expensive on traditional metrics and it doesn't offer a dividend. AT&T is much cheaper, and it offers a very healthy -- and sustainable -- dividend.

Normally, that would make AT&T an easy choice. But when we look at for the potential for growth -- represented by the PEG ratio -- T-Mobile appears to be 56% cheaper than AT&T. Of course, there's no way to know if those growth assumptions will be accurate, but they speak to the differences between these two stocks.

Because of that, I'm calling this one a tie.

Winner = Tie

And the winner is...

So there you have it: We've got a draw. In the end, I would break it down like this: If you're nearing retirement and are looking for a solid dividend and steady stock, AT&T is definitely the way to go. If you have a longer time frame and can withstand some volatility, then T-Mobile is probably right for you. Both are quality companies worth investigating further.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.