AT&T (T) or Verizon (VZ)? It’s a question that investors in both companies have asked themselves at one point or another.
As someone who has owned both AT&T stock and Verizon stock and has followed both companies for more than a decade, I’m here to tell you the answer to that question isn’t nearly as difficult as it may seem.
The answer is AT&T, and there are three really good reasons why.
AT&T Stock Can Afford What it Gives Investors
AT&T and Verizon are both high-yield investments. However, T pays a dividend yield of 5.8% versus 5.1% for VZ.
AT&T has free cash flow of $12.3 billion over the last four quarters, and 94% of that free cash flow is spent on dividends. This is important because it proves that AT&T creates enough profit from operations to fund both dividends and capital expenditures while still having some cash left over.
In comparison, Verizon’s dividend payouts over the next four quarters would be approximately 12% more than its $8.1 billion in free cash flow during the last 12 months.
In other words, Verizon can’t afford to pay its dividend on free cash flow alone, whereas AT&T still has money left over.
AT&T’s Profits Are Going Higher, VZ Stock Wasted $130 Billion
Believe it or not, AT&T and Verizon have the same amount of debt on their balance sheets, about $114 billion. The large debt hauls for both companies are the result of high-profile acquisitions in recent years.
VZ stock’s problem is that it essentially wasted $130 billion by acquiring the remaining 45% stake of its wireless business from Vodafone (VOD), whereas AT&T gained something of extreme value in exchange for its debt.
When Verizon paid $130 billion to acquire the remaining interest in its wireless operations, increasing its debt by $50 billion, the company promised that its EPS and free cash flow would be driven higher as a result of the acquisition. However, that has not been the case.
Click to EnlargeVerizon’s trailing-12-month free cash flow has declined 53% over the last five years, whereas AT&T’s has declined just 18%. Given the fact that Verizon spent $130 billion to drive profits higher, I’d say that it wasted that money.
Meanwhile, we have yet to see the effect of AT&T’s DirecTV acquisition, which is largely responsible for the $30 billion in debt that T stock added to its balance sheet in 2015. However, we do know that DirecTV generated more than $3 billion in free cash flow over the last year.
Also, AT&T stock will not only gain that free cash flow from DirecTV’s existing operations, but it also expects an additional $2.5 billion in cost savings annually through 2018.
Thus, the acquisition of DirecTV could have a $5 billion or more impact to T stock’s profit, allowing it to pay off debt and increase its dividend.
AT&T Stock Has Growth Opportunities; Verizon Is Limited
Last but not least, AT&T and Verizon are two companies that have gone in two completely different directions, and it certainly appears that AT&T made the better choices.
When Verizon completed that $130 billion acquisition, it was taking a huge bet on its U.S. wireless business. What Verizon could not foresee was a ferocious price war within the wireless arena that forced the company to cut prices and become far more promotional than it desired. This has contributed largely to its decline in free cash flow.
Furthermore, Verizon has said many times that it will not expand internationally, mainly in Mexico, thereby making VZ stock vulnerable to whatever becomes of the U.S. wireless market. This is bad given that Sprint (S) and T-Mobile (TMUS) launch a new wireless promotion just about every week.
To make matters worse for Verizon, it unwisely divested $10 billion of highly profitable wireline assets earlier this year. As a result, the company’s CEO recently said that 2015 and 2016 will be a plateau period for profits, and that growth will continue in 2017.
Given the rapid changes that are occurring in the U.S. wireless space, VZ stock investors should be highly skeptical that such growth will ever occur.
Meanwhile, AT&T will grow in 2015 and 2016 by approximately 15.6% and 12.4%, respectively, according to analysts. The reason is its acquisition of DirecTV, which will bring about revenue growth, free cash flow growth and cost synergies. Also, there is an unaccounted for opportunity in Latin America where DirecTV owns a spectrum portfolio covering 50 million households for broadband use.
AT&T will now have the opportunity to move in and offer services to those 50 million potential customers, thereby giving it an opportunity that Verizon could not possess in the U.S. alone.
In addition, AT&T has moved into Mexico with two other acquisitions, Iusacell and Nextel Mexico, and is planning to invest $3 billion in the region to improve its network. The move into Mexico gives AT&T an enormous advantage over Verizon, as it increased the size of its network from 300 million to 400 million. That’s 100 million potential customers that Verizon has no access too.
Bottom Line
AT&T has grown its network and expanded into new regions. Verizon has done neither of these things. AT&T stock’s dividend is also sustainable, its debt manageable … and once more, VZ stock does not share the same luxury.
Verizon and AT&T are still talked about in the same sentence, but the latter is clearly the superior company.
My guess is that AT&T stock will soon create separation, both short-term and long-term.
As of this writing, Brian Nichols owned shares of AT&T.
