Better Buy: AT&T Inc. vs. Verizon Communications
The U.S. wireless industry is dominated by AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). The two telecom giants account for about 70% of wireless customers and an even larger share of industry profits. But with pressure from T-Mobile and Sprint in the recent past, both have struggled to grow revenue.
Still, investors looking to get into the telecom space may be attracted to AT&T and Verizon due to their scale and dividends. But which stock makes a better buy: AT&T or Verizon?
A titan of wireless and pay TV
Since acquiring DIRECTV, AT&T became one of the largest pay-TV service providers in the country on top of its dominant status in the wireless industry. Now, it's trying to acquire Time Warner (NYSE: TWX), which would further expand the company both horizontally and vertically.
But both the wireless and pay-TV businesses are bleeding thousands of their most valuable subscribers every quarter. Last quarter, AT&T lost 97,000 postpaid phone subscribers and 89,000 video subscribers, including 385,000 DIRECTV satellite and U-Verse subscribers. Both the mobility and the entertainment segments showed year-over-year declines in revenue.
AT&T has aimed to boost its wireless service margin by cutting costs. Pricing pressure from T-Mobile and Sprint, however, has resulted in steadily declining revenue per user. AT&T has been most aggressive in bundling its wireless service with its pay-TV service in order to offset the pressure from lower-priced competitors. Still, it's losing subscribers and sacrificing margin on its pay-TV business.
The Time Warner deal would provide AT&T with yet another avenue to generate revenue, but there's not much for AT&T to gain from the deal. Perhaps its content expense and its existing "HBO for life" promotion costs would decline a bit, but the economics don't make sense to limit any Time Warner content to AT&T's distribution channels. Meanwhile, the deal would simply add to AT&T's ballooning debt load.
Verizon isn't immune to competition, either
Verizon has also struggled to grow its business. Wireless service revenue declined 11 straight quarters before finally making a sequential improvement last quarter. Total operating revenue for the wireless segment continues to fall year over year every quarter. Likewise, average revenue per account is falling despite an increasing number of connections per account.
Verizon's wireline business is performing somewhat better than AT&T's, maintaining its revenue and TV and internet subscriber bases. Margins for the business are also improving, as Verizon has sold off its underperforming assets in the segment.
Overall, Verizon's business looks in much better shape than AT&T's. It's starting to add new postpaid phone subscribers again, following the introduction of its unlimited plan. Its service revenue is starting to climb again, which should lead to year-over-year revenue growth in 2018. And it's not bogged down by a giant, lower-margin, struggling pay-TV business.
A look at valuation
AT&T and Verizon both trade for similar valuations. AT&T's enterprise value-to-EBITDA ratio of 6.6 is just below Verizon's 6.8. That's not a big enough discount on its own to consider AT&T over Verizon considering the broader risk the company faces with its massive pay-TV segment.
AT&T's dividend yields 5.6% compared to Verizon's 5.3%. That said, AT&T's dividend payout ratio is slightly higher than Verizon's, making Verizon's dividend a bit safer. The competitive environment and the large debt loads at both companies have resulted in minimal dividend growth for both stocks in recent years, though. Each increased their dividend about 2% this year.
At these prices, Verizon looks to be the better buy compared to AT&T stock. The former is already in the midst a turnaround in its wireless business, while AT&T is still struggling. Trading at a comparable value and with a comparable dividend yield, Verizon makes sense for most investors over AT&T.
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Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Time Warner and T-Mobile US. The Motley Fool has a disclosure policy.