With bond yields scraping along at pitifully low levels, telecom giants like Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) have been popular bond substitutes for several years now. The two communications behemoths might not be particularly sexy, but they are nothing if not consistent. Americans pay their mobile phone bills like clockwork every month, and VZ stock and T stock convert that income stream into rock-solid quarterly dividends.
But which of these two dividend darlings is the better choice at today’s prices?
Let’s take a good, hard look at both VZ stock and T stock, and may the best telco win a spot in your portfolio.
AT&T vs. Verizon: Dividends
Since most investors are attracted to Verizon and AT&T specifically because of the high yield, we’ll look at the dividend first. On a raw yield basis, T stock’s 4.7% yield takes a slight lead over VZ stock’s 4.6% yield. But I would consider the two to be close enough to be a virtual wash.
Considering that both stocks are perennial dividend raisers, a 0.1% difference can be erased in a single quarter.
And speaking of dividend hikes, neither stock is a slouch. VZ stock has raised its dividend every year for the past 10 years. Though not to be outdone, T stock has raised its dividend for a whopping 32 years.
VZ’s dividend growth had been a little on the anemic side lately, growing at a rate of about 3% over the past three years. But that’s actually a little better than the 2% dividend growth rate that T stock has mustered.
Based on currently profitability, Verizon also has a little more room for future dividend hikes, as its payout ratio is lower (66% vs 81% for AT&T).
All in all, Verizon is the winner here. It makes up for its marginally lower yield by having a higher growth rate and a lower payout ratio.
VZ Stock vs. T Stock: Valuation
Now let’s talk valuation. We’ve already discussed dividend yield, and by that metric the two telcos are a virtual tie. But let’s now consider earnings.
VZ stock trades for 14.5 times trailing earnings and 12.3 times expected forward earnings. T stock is a little more expensive, trading at 17.6 times trailing earnings and 14 times expected forward earnings.
On a price/sales basis, both stocks trade at around 1.6 times sales. Interestingly, that’s about in line with AT&T’s average P/S valuation over the past 10 years, but it’s considerably higher than Verizon’s average. Going back to the tail end of the dot-com bubble, Verizon has consistently been cheaper than AT&T by this metric.
Investors seem to be valuing these two telecom giants very comparably, so based on the numbers alone I’ll call this one a wash.
VZ Stock vs. T Stock: Future Prospects
I’m really not sure what Verizon is thinking these days. The company agreed to buy Yahoo! Inc. (NASDAQ:YHOO) last year, which would seem like perfectly good shareholder money flushed down the toilet given Yahoo’s struggles in recent years. This follows Verizon’s decision to buy also-ran AOL back in 2015. All of this seems like a distraction at a time when Verizon should be focusing on defending its turf in mobile communications and high-speed internet and TV service.
Furthermore, Verizon is exclusively a domestic U.S. company. Given that the domestic market for smartphones, internet and paid TV are all completely saturated at this point, that’s a problem.
AT&T has had a few mergers of its own, most notably its recent agreement to buy Time Warner Inc (NYSE:TWX).
While I’m naturally skeptical of most mergers, this one at least differentiates AT&T. Phone and internet service have become commoditized businesses, which makes charging a premium price difficult. Time Warner — which owns CNN, TNT, HBO and other media networks — gives AT&T ownership of high-quality content.
AT&T also has better international exposure than Verizon following its expansion into Mexico and its acquisition of DirecTV. And while international exposure seems to be more pain than gain in this era of the strong dollar, over the long term it should yield better results over time as income in emerging markets rise.
So on the issue of future growth prospects, I’m giving the nod to AT&T.
All in all, I’d take T stock over VZ stock. Verizon is the slightly better dividend payer, but the two are comparably priced and AT&T’s growth prospects look better.
As of this writing, Charles Sizemore did not hold a position in any of the aforementioned securities.
