Better Buy: AT&T vs. Verizon Stock

AT&T (T -0.12%) Y Verizon (VZ 0.54%) they’re two titans of the telecommunications industry, and each company’s respective stocks have long been go-to vehicles for income-focused investors. Which of these dividend-paying telecom stocks is the best buy at current prices? Read on to see why two Motley Fool contributors have different perspectives on which company seems like the better investment.

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George Budwell: Telecom giant AT&T is a company in transition. Over the past two years, AT&T has spun off its DirecTV and WarnerMedia media assets and subsequently returned to its telecommunications roots by investing heavily in 5G fiber and wireless networks.

The transition has not been easy for shareholders. As a result of losing revenue from its media business, a renewed focus on deleveraging its debt-laden balance sheet, and its continued push to increase 5G fiber and wireless coverage, AT&T has had to cut its coveted dividend. Even so, AT&T shares continue to pay a healthy return of 6.6% on an annualized basis.

However, AT&T’s high dividend yield isn’t the only reason to consider buying its stock. Thanks to the ongoing bear market and a recent spike in late payments by customers, AT&T stock is down almost 10% year-to-date in 2022. As a direct result, shares of the Telecom giant is currently trading near an all-time low from a price-earnings perspective. In other words, investors have probably gone overboard with bearish sentiment towards this top telecommunications stock. After all, AT&T’s return to its core telecommunications business has been paying dividends in terms of winning new customers, thereby increasing its share of this massive market.

So, unlike times past when AT&T was essentially a pure revenue stock, the telecom giant’s stock is also now a very attractive value game. Wall Street, in fact, believes that AT&T stock is currently 48% undervalued. Therefore, AT&T stock could be one of the best deals in telecoms right now.

Verizon has maintained a stricter strategy in recent years

Keith Noonan: Instead of pursuing expensive media acquisitions and other big growth bets outside of its core competencies, Verizon has been much more focused on building out its wireless services over the past half decade. That has proven to be a smart move and has given the company more room to invest in wireless band spectrum and other infrastructure core to its 5G strategy.

Verizon has been improving the coverage area, speed and reliability of its 5G network, with Root Metrics ranking the company the most reliable 5G provider in the first half of this year. The stock is now trading down about 21% year-to-date, and the big sell-offs have had the effect of pushing its price-earnings ratio and dividend yield to very attractive levels.

Chart showing Verizon's PE ratio decline and dividend yield rise in 2022.

VZ PE ratio (forward) data by YGraphics

Verizon already has 15 straight years of annual dividend growth under its belt, and strong free cash flow generation, even as it invests heavily to develop its next-generation network technologies, suggests investors can expect continued increases in revenues. Payments. The company’s large investments in C-band wireless spectrum and other 5G resources should start to pay off after hurting short-term profitability, and the market may be underestimating the opportunities in fiber telecommunications and fixed wireless Internet.

I previously had high hopes for AT&T’s media strategy and I still have a small position in the company following the spin-off of Discovery of Warner Bros., but I think the merger ordeal ultimately caused it to miss out on a few steps in the 5G race. While I wouldn’t be surprised to see AT&T recover from current price levels, I think Verizon has a better position in next-generation network technology and currently stands out as the best buy.

Which high-yield telecom stock is the best buy?

AT&T stock looks even cheaper than Verizon by some valuation metrics, offering a higher return even after its significant dividend cut. On the other hand, Verizon’s business appears stronger thanks to management’s decision not to stray too far from the company’s core telecommunications offerings.

For investors looking for high-yield stocks or interested in having diversified exposure to the telecommunications sector, it might make sense to invest in both AT&T and Verizon. Otherwise, investors should weigh AT&T’s lower valuation and higher yield against Verizon’s more promising business base to determine which is a better fit for the portfolio.

George Budwell has no position in any of the mentioned stocks. Keith Noonan has positions at AT&T and Warner Bros. Discovery, Inc. The Motley Fool recommends Verizon Communications and Warner Bros. Discovery, Inc. The Motley Fool has a disclosure policy.

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