By AT&T (T) and Verizon (VZ) have much in common. They are both the biggest telecommunication companies in the US, pay substantial dividends to their investors, and have a huge debt burden.
Additionally, the companies have similar valuation multiples. Verizon has a forward PE ratio of 9.15 while AT&T has 9.09. Their price-to-book ratios are almost identical at 1.83 and 1.35, respectively.
They also have substantial debt loads, with Verizon and AT&T having over $149 billion and $130 billion. Which is a better buy between Verizon and AT&T?
AT&T turnaround is continuing
AT&T stock price has done well in the past few months. After bottoming at $12.69 in September last year, the stock has jumped by more than 62% to $20.44. Most recently, the stock has risen for three consecutive weeks. AT&T’s performance is a sign that the company’s turnaround was working.
This turnaround has been painful to investors. Most notably, it was painful to those seeking regular dividends as the company slashed it in 2022. The management justified this cut, saying that it was necessary to put the company in a good financial footing during its turnaround.
As part of its turnaround, the company decided to spin off its Time Warner business into a separate media company. Warner Bros then merged with Discovery to form Warner Bros. Discovery, a company valued at over $50 billion. Since then, WBD stock has collapsed, meaning that AT&T exited at the right time.
Exiting the Time Warner transaction was notable because the company had acquired it for over $85 billion in 2018.
Today’s AT&T is a simpler organization with a relatively better balance sheet than in the past. The most recent results shows that its debt load has dropped from over $151 billion in 2020 to $126 billion today. It is working to reduce its net debt-to-adjusted EBITDA to be about 2.5x by next year.
AT&T is also working to reduce its operational expenses by about $2 billion by 2026. To do that, the company has slashed over 74,000 workers as part of its $8 billion cost-cut program.
The most recent results showed that its revenue came in at $29.8 billon while its free cash flow rose to $4.6 billion. This happened as the company increased 419k postpaid customers and 239k fiber customers.
The company hopes that its annual free cash flow will be between $17 billion and $18 billion while its wireless and broadband revenues will rise by 3% and 7%.
Verizon faces key headwinds
Verizon stock price has also recovered well in the past few months as it jumped by over 50% from its lowest point in December. It has soared to its highest point since July 2022.
The most recent results revealed that Verizon’s revenue rose by just 0.6% in the second quarter to $32.8 billion.This growth was driven by the services segment whose revenue rose by 1.8% and offset by wireless equipment whose revenue fell by 5.3%.
Verizon’s net income fell slightly to $4.7 billion while its free cash flow for the first half of the year rose slightly to $8.5 billion. It also ended the quarter with $125.3 billion in unsecured debt and a debt-to-net income ratio of 10.7x. Its total debt was $159.2 billion and a total debt to EBITDA multiple of 3.14.
Good value plays but AT&T stock is a better buy
AT&T and Verizon are often seen as top value companies that trade at a discount to the broader market.
While the S&P 500 index has a forward P/E ratio of 21, Verizon and AT&T has multiples of 9.15 and 9.09. This difference in valuation is mostly because the two companies, as demonstrated above, are no longer growing. S&P 500 companies had a blended earnings growth of over 10%.
There are a few reasons why AT&T is a better investment than Verizon. First, it has reduced its debt significantly in the past few years and the management hopes to hit the 2.5x leverage ratio in the next few months, which is highly achievable.
AT&T has a debt-to-free cash flow of 15.50 while Verizon has a ratio of 33, meaning that it is in a better shape. Also, AT&T has $3.16 billion of cash compared to Verizon’s $2.95 billion even though it has a smaller market cap.
Second, AT&T has higher margins than Verizon. The two have a similar gross margin of 55% but AT&T has a net income margin of 10% compared to Verizon’s 8.3%.
Third, while the two are no longer growing, there are signs that AT&T has a stronger momentum. It has a forward revenue growth rate of 0.62% compared to Verizon’s minus 0.62%
Additionally, AT&T is cheaper than Verizon with its trailing P/E ratio of 11.7 compared to VZ’s 16.13. Therefore, as I predicted in July, AT&T stock price has more room to grow in the near term.
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