Shares of AT&T(NYSE: T) and Verizon Communications(NYSE: VZ) are enjoying a resurgence in 2024 after hitting a 52-week low of $15.46 and $35.40, respectively, last November. Year to date, AT&T stock is up by more than 30% while Verizon is up by about 7% through Nov. 11.
In addition, both offer robust dividends. At their current share prices, AT&T's forward dividend yield is about 5% while Verizon's is more than 6%.
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With both stocks' performances improving compared to last year, and with both looking like solid sources of passive income, does one telecom titan make a better long-term investment than the other now? The answer isn't simply a matter of picking the one with the higher dividend yield.
AT&T and Verizon's strategic priorities
AT&T and Verizon have made growing their mobile wireless and fiber optic internet businesses their top priorities. These services are important because customers who buy both from one provider are less likely to switch to a competitor.
In Q3, AT&T's mobile wireless service revenue rose by 4% year over year to $16.5 billion, while Verizon's saw 3% growth over 2023 to $19.8 billion. Both are doing well expanding mobile service revenue, which is critical since it's their largest income source.
As for consumer fiber sales, AT&T achieved an impressive 17% year-over-year increase to $1.9 billion in the third quarter. Verizon's Fios-branded consumer fiber service produced $2.9 billion in Q3 revenue, which was essentially flat compared to last year.
Verizon's stagnant fiber sales might at first seem concerning, but in September, the company announced its intention to acquire Frontier Communications Parent. Frontier provides fiber internet service across 25 states, and generated $1.5 billion in Q3 sales, a 4% increase year over year.
The specter of debt
The Frontier acquisition promises to boost Verizon's fiber revenue, but the deal contains downsides. Frontier exited Q3 with more than $11 billion in debt.
Both Verizon and AT&T already carry massive debt loads -- $129 billion for AT&T and over $150 billion for Verizon, as of the end of Q3. That's a key factor in weighing the investment cases for these telecoms, because if either one lets its debt grow too large, it could affect dividend payments.
That's already the case for AT&T. It has kept quarterly payouts unchanged since its last increase in 2019, focusing instead on reducing debt and making capital expenditures to expand its 5G wireless and fiber optic networks. Verizon, by contrast, has provided investors with 18 consecutive years of annual dividend increases.
An important metric for gauging a company's ability to reduce debt, invest in its business, and pay dividends is free cash flow (FCF). Through the first three quarters of 2023, AT&T's FCF totaled $12.8 billion compared to $10.4 billion in the prior-year period, while Verizon's year-to-date FCF was $14.5 billion, a slight drop from the prior-year period's $14.6 billion.
Both, however, consistently produce excellent FCF, an indication that they can generate the cash to address the needs of their businesses.
Choosing between AT&T and Verizon stock
Although Verizon has produced more FCF than AT&T so far in 2024, the latter's excellent year-over-year FCF growth is an encouraging sign. AT&T's fiscally responsible approach, eschewing dividend hikes for debt reduction and business expansion efforts, is setting the company up for long-term success.
AT&T is working to bring its net debt-to-adjusted EBITDA ratio down to a reasonable 2.5 -- management anticipates hitting that target in the first half of 2025. Verizon's ratio was at 2.5 as of the end of the third quarter. Once AT&T meets its debt ratio goal, perhaps it will return to raising its dividend. Before it paused its hikes, AT&T had a streak of 36 consecutive years of dividend increases.
Meanwhile, Verizon's deal to purchase Frontier will add more to its debt load. Worse, Frontier had an FCF loss of $81 million in Q3. These factors could jeopardize Verizon's ability to continue raising its dividend.
Given the pros and cons of each company, it's tough to decide between them as investments. Verizon's high dividend yield and its track record of payout hikes makes it appear to be a compelling investment now. But its Frontier acquisition introduces risks for its future.
AT&T's key businesses and financial health are steadily strengthening, and I think it will eventually return to providing investors with dividend hikes. Considering these factors, AT&T edges out Verizon as the better telecom stock to buy now for the long haul.
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Robert Izquierdo has positions in AT&T and Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
