Better Buy: The Walt Disney Company vs. AT&T

If you wanted to pit Marvel superheroes against the crime fighters at DC Comics, most people know that you would have Disney (NYSE: DIS) in one corner. Disney acquired Marvel nine years ago in a roughly $4 billion transaction. However, many investors would probably be surprised to see AT&T (NYSE: T) step into the ring in the other corner. The telecom giant closed on its $110 billion deal for Time Warner in June, and that means that the fight between Marvel and DC is now essentially between Disney and AT&T.

Both stocks are essentially out of favor, though Disney is starting to bounce back in recent weeks. However, Disney shares are still trading below the all-time highs they set three summers ago. AT&T's dividend-adjusted peak was two summers ago, and it's currently trading lower in 2018. Will Disney provide investors will a fairytale finish, or will AT&T make the right connection? Let's size them up to see which stock is the better buy right now.

Sorting out the superheroes

Disney and AT&T aren't afraid to cut big checks to acquire major properties in order to help shake some of the stagnancy off of their legacy businesses. Disney has paid billions to snap up Marvel, Pixar, and Lucasfilm, beefing up its content library along the way. AT&T has cut even bigger deals for DIRECTV and now Time Warner.

Disney wants to prove that it has a future beyond cord-cutting millennials, who are dumping their cable providers in favor of streaming services, a problematic development since media networks is Disney's largest business. AT&T is leaning on satellite television and now studio content to make sure that it's not just its wireless carrier business aiming to offset folks nixing their landlines. Both companies are working on big streaming-video initiatives that they expect to roll out in the next year or two.

Sizing up growth at the two companies isn't easy, largely because all of the needle-moving acquisitions. It's hard to tap each superhero parent's organic growth, especially since they are both adept at integrating the purchases across other properties. Try to sign up for DIRECTV and you will be prompted to consider a bundle with AT&T internet and wireless services. A Pixar movie comes out at the corner multiplex and the franchise will seamlessly work its way through Disney's theme parks, retail stores, and eventually, its cable properties.

Despite the big deals and their historical success at absorbing the acquired properties, neither company is at its best right now when it comes to top-line growth. Disney and AT&T posted slight declines in revenue last year. Disney's theme parks business was the only one of its four segments to post growth in fiscal 2017. Disney is starting to bounce back in fiscal 2018, but AT&T is still struggling. Consolidated revenue was roughly flat on an adjusted basis in AT&T's latest quarter, as declines in domestic video and its wireless services tripped up growth in its other businesses. At the end of the day, we've seen operating revenue clock in with a year-over-year decline for seven straight quarters.

Disney gets the nod in terms of growth, but AT&T has the upper hand when it comes to valuation. AT&T is trading at just nine times this year's earnings. Disney fetches 16 times this year's earnings. AT&T also commands slightly more attractive revenue and cash flow multiples, though it's not always a fair comparison when two companies in slightly different industries are squaring off with one another.

Both companies pay out dividends, but AT&T's yield of 6.1% runs circles around Disney at 1.5%. AT&T's distributions may be four times larger, but it's not really over its head here. AT&T commands a reasonable payout ratio, and it's a dividend aristocrat after 25 consecutive years of hikes.

Both companies have their advantages, and I personally own both stocks. However, given all the uncertainties as AT&T integrates Time Warner into its system, it's clear that Disney is the smarter buy here. There may be struggles at ESPN and its other cable properties, but the next few years have plenty of exciting new movies and theme park attractions on the way. AT&T has assembled an interesting collection of properties, but Disney's already a well-oiled machine on that front.

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Rick Munarriz owns shares of AT&T and Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.