Should you jump on the AT&T bandwagon or take a chance on Verizon in the hopes it’s due for a big rally?
AT&T (T 1.22%) and Verizon Communications (VZ -0.24%) are two of the highest-yielding telecom stocks you can own right now. Both businesses are doing reasonably well amid the current market conditions and expecting solid single-digit growth. And with interest rates coming down and investors seeking out high returns, these stocks could become more popular in the months ahead.
But which stock is the better option to buy right now? Let’s find out.
The case for AT&T
AT&T provides investors with a high yield of 5%, and that’s with the stock having done quite well this year, rallying 30% since January. Investors are warming up to the telecom giant, which in the past was seen as a riskier investment due to its expansion into the streaming business.
But in recent years, AT&T has moved away from that and focused more on its core telecom operations instead. The company has recently announced that it is selling its stake in DirecTV for $7.6 billion, in a step that signifies its exit from the costly and highly competitive entertainment business.
Dividend investors appear to be pleased with the company’s recent moves as they add more stability to AT&T’s overall operations, which are growing steadily. In its most recent quarter, which ended on Sept. 30, AT&T reported 226,000 net additions to its fiber business — that’s the 19th straight quarter where that metric was above 200,000. The company now has 28.3 million fiber locations set up, and it expects that number to climb to 30 million by the end of next year.
AT&T also projects that its wireless service revenue will grow by around 3% this year and its free cash flow will total between $17 billion and $18 billion. Given that the company pays $8.2 billion in dividends over the course of a full year, there’s ample room for the business to justify an increase to the payout amid such strong results.
On top of all that, AT&T still trades at a fairly modest forward price-to-earnings (P/E) multiple of 10 (based on analyst estimates). Even despite its strong performance this year, AT&T can make for an excellent long-term buy.
The case for Verizon Communications
Verizon’s stock hasn’t gotten nearly as much love as AT&T this year, with its shares up a much more modest 9% thus far. But that also helps bolster the case that the telecom stock may be overdue for a big rally. And its lackluster performance is a key reason why Verizon’s yield also remains fairly high at 6.6%.
The company is generating similar growth to AT&T — it’s projecting that its wireless service business will also expand at a rate of around 3% this year. What may bolster its long-run growth prospects is its plan to acquire Frontier Communications for $20 billion, which would expand its fiber network. The deal is not approved and it would result in more debt for Verizon, but in the long run it could accelerate its growth rate. And as interest rates come down, debt may be easier to pay down and may become less of a concern for investors, especially if the business is generating strong results.
And while AT&T might or even should raise its dividend, a growing payout is what Verizon investors have come to expect from the business by now. In September, Verizon increased its dividend for the 18th straight year. It was a modest 1.9% increase but over the past decade, the telecom company has increased its payout by 23%. With Verizon already providing investors with a high yield, there isn’t as much of a need for a big hike anyway as investors are already collecting an extremely generous dividend as it is.
Verizon is also a cheaper buy than AT&T as it trades at a forward P/E of just under 9. Although investors haven’t been rushing out to buy the stock, it could have plenty of upside given its attractive yield and potentially improved growth prospects should the deal with Frontier go through.
Which stock is the better buy today?
Both of these stocks look good today but I’d give the edge to Verizon. Its valuation is more attractive, so is its yield, and the business looks to be focused on expanding its fiber business, which should result in higher growth rates in the years ahead. It may only be a matter of time before investors become more bullish on this top dividend stock.
