Investors on the hunt for higher dividend yields shouldn’t ignore the U.S. top telecom operators: Verizon (NYSE:VZ) and AT&T (NYSE:T). The two players enjoy a dominant position in the U.S. telecom market. Indeed, smaller players can’t even get close to the volume of their subscribers and superiority of their networks.
With this duopoly-type situation, however, it's difficult for investors to figure out which stock is a better buy right now. Let’s examine both Verizon and AT&T to figure out which telecom is in a superior position to provide growth for investors.
Share Price Performance
Verizon shares didn’t do much during the past 12 months, remaining almost flat in the period when the S&P 500 rose more than 14%. The main reason of this underperformance was the intense competition in the crucial wireless market where Verizon struggled in 2017.
Through their aggressive marketing, AT&T and T-Mobile (NASDAQ:TMUS) snatched a significant number of customers from the biggest U.S. wireless carrier, which had to then offer unlimited data plans in order to continue luring subscribers. But in its Q4 2017 earnings report, it appears Verizon has started to turn the corner.
Verizon added 1.2 million net new wireless customers, operating revenue rose 5% year-over-year and Internet of Things revenue soared 17%. As well, sales at the company's media business, Oath, rose 10%.
Verizon management is also estimating that the company's full-year 2018 revenue will grow by low-single-digit percentages, which is better than the 1% analysts had been expecting.
AT&T shares, on the other hand, performed poorly during the past 12 months when compared to Verizon. Its shares plunged 12% in the period as investors remained on the sidelines as the company struggles to overcome legal hurdles to acquiring Time Warner (NYSE:TWX) in an $85-billion deal.
The Justice Department sued in November to try and stop AT&T, which owns DirecTV, from buying movie and TV content creator Time Warner, arguing the deal would mean higher prices for rival cable and online video distributors as well as for consumers.
Future Growth Drivers
For long-term income investors, what matters most while deciding between the two top dividend payers in this sector is which one has the best strategy for success in the fast changing world of technology. By this metric, both Verizon and AT&T have made some strategic moves with the potential to unlock future growth.
Verizon bought Yahoo (NASDAQ:AABA) last year for $4.5 billion, in order to package its content with AOL to create a company called Oath.
AT&T, on the other hand, wants to combine its telecommunications assets with Time Warner’s media empire to bundle wireless with TV and internet for millions of customers.
Both telecom giants are also investing heavily in the game-changing, next generation of wireless networks, known as 5G, to expand their wireless dominance. 5G networks will enable new technologies and connect millions more everyday devices including smart appliances, wearables and cars.
I think Verizon is ahead in this race due to its acquisition of Straight Path. After an intense bidding war with AT&T, Verizon recently completed a deal to buy Straight Path Communications for $3.1 billion. Straight Path holds very valuable licenses in the wireless spectrum that can be used for delivery of faster 5G service.
Which Is Better?
Both stocks have a solid track record of rewarding investors with the growing dividend payouts. With an annual dividend yield of 4.84%, Verizon hiked its quarterly dividend by 2.2% last year to $0.59 a share. This was the 11th consecutive year that Verizon's Board approved a quarterly dividend increase.
At 5.4%, AT&T has a juicier dividend yield and a 34-year of history of consecutive payout hikes. Investors received a 2% increase in the quarterly dividend to $0.50 per share in December.
Assuming that AT&T’s Time Warner deal goes through, it will create a major spike in the company’s net debt level, forecast to touch $182 billion, slightly more than triple the EBITDA of the combined companies, according to Bloomberg calculations. That will stretch AT&T’s balance sheet and may make it harder for the company to grow its dividend going forward, unless it finds a way to cut its debt load.
I think investors are better off ignoring AT&T’s attractive dividend yield at this point and should wait on the sidelines until there's a decision on the Time Warner merger. Buying Verizon, which has been much more aggressive in its 5G roll-out and also has a better balance sheet is the less risky play for long-term investors.