Better Telecom Dividend Stock: Verizon or AT&T?
A critical shoe just fell today in the longstanding rivalry between Verizon (NYSE:VZ) and AT&T (NYSE:T). AT&T unveiled its full plan to spin off WarnerMedia from Discovery in the second quarter, forming a new company called Warner Bros. Discovery.
However, AT&T fell 4% in Monday’s trading, with the same press release revealing it would only return $8 billion to shareholders a year in dividends. This brings his payout size to the lower end of the estimates. The move could have income investors wondering if Verizon is now the most attractive dividend-paying stock in the telecom sector.
With the dividend cut, AT&T will pay its shareholders $1.11 per share per year. This is a 47% reduction from the previous $2.08 per share in annual installments, bringing the yield to 4.6% at current prices.
Yet despite the disappointment of the lower payout, AT&T’s dividend yields nearly 3.4 times more than the S&P500 average, currently 1.3%. It also doesn’t significantly delay Verizon’s payment. Verizon’s annual dividend of $2.56 per share offers cash yields of just over 4.8%.
Plus, both companies can afford their dividends. AT&T generated $26.8 billion in free cash flow in 2021. This is down slightly from $27.5 billion in 2020 and provides sufficient funding for $8 billion in annual dividend costs. ‘AT&T. Verizon’s free cash flow in 2021 was $19.3 billion. While that’s dropped significantly from $23.6 billion in 2020, he can still cover the $10.5 billion cost of his payout.
However, since AT&T waived its Dividend Aristocrat last year, AT&T’s dividend may face a quality issue. Once a company begins to build a series of annual payout increases, confidence in the stock tends to become increasingly dependent on continued annual dividend increases.
Although Verizon is no aristocrat, its 15 years of consecutive increases increases the likelihood that its streak will continue. Without a record of dividend-boosting annual increases from AT&T, AT&T could cut the dividend further if it continues to struggle, a factor that could discourage some income investors from buying AT&T.
Current financial situation of each company
Despite AT&T’s more uncertain outlook for dividend investors, the dividend cut could put AT&T on a stronger financial footing. With AT&T preparing to spin off from WarnerMedia, total debt now stands at around $177 billion, although a $43 billion injection from the spin-off should help reduce that debt.
Verizon’s network played a significant role in building up its $151 billion debt burden. Verizon has consistently led the way in quality, winning the most network quality awards from JD Power for 27 consecutive years.
Yet its debt rose last year after Verizon invested $52.9 billion in C-band spectrum, more than double AT&T’s $23 billion spectrum purchase. Spectrum is RF real estate that gives a company the right to use specific RF frequencies in defined areas.
Verizon has less debt at the moment. But, AT&T’s higher cash flow and reduced dividend burden could position AT&T to better manage those obligations. Additionally, with AT&T now focusing almost exclusively on its network, it can make investments to improve the quality of its network.
Nonetheless, the outlook for improving financials did little to help either stock. AT&T has lost 15% of its value over the past year, while Verizon has fallen 3%. Moreover, neither AT&T’s price-earnings ratio of nine nor Verizon’s earnings multiple of 10 attracted buyers despite the generous dividends. This indicates that both companies may need to further strengthen their balance sheets to attract investors to their shares.
AT&T or Verizon?
Under current conditions, Verizon appears to be the most likely stock to help a sleep well at night in 2022. Certainly, Verizon could use the debt as an excuse to follow AT&T’s lead and end its series of dividend increases.
Still, Verizon’s dividend-boosting streak means it has more to lose than AT&T by cutting its payouts. Moreover, it holds a lead in network quality, and the large purchase of spectrum means that it has already made many of the investments needed to maintain that lead. These factors put Verizon and its dividend in a safer position.
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