Verizon (NYSE:VZ) and AT&T (NYSE:T) have both long been considered reliable dividend stocks for conservative investors. But over the past decade, Verizon stock generated a total return of more than 40% after factoring in reinvested dividends. AT&T generated an anemic total return of 3%.
Let’s see why Verizon outperformed AT&T by such a wide margin, and whether or not it will remain the better investment over the next five years.
Similar origins, different evolutions
Verizon and AT&T were both once part of the original AT&T, which antitrust regulators split into the “Baby Bells” in the early 1980s. Bell Atlantic became Verizon, and Southwestern Bell became the modern AT&T after buying the remnants of its former parent company in 2005.
Verizon previously shared Verizon Wireless with Vodafone. But in 2014 it bought out Vodafone’s 45% stake for a whopping $130 billion, which caused its debt levels to soar.
Verizon then bought AOL for $4.4 billion in 2015 and Yahoo’s internet assets for $4.5 billion in 2017 to expand its online media and advertising businesses. But it recently agreed to sell 90% of those assets to Apollo Global Management for just $4.25 billion.
AT&T expanded its pay-TV business by buying DirecTV for $49 billion in 2015. It spent another $18 billion on AWS-3 spectrum licenses that same year, then bought Time Warner for $85 billion in 2018. That shopping spree also caused AT&T’s debt levels to skyrocket.
However, AT&T’s purchase of DirecTV increased its exposure to the dying pay-TV market just as cord-cutters switched to streaming services. Its purchase of Time Warner also floundered as the pandemic throttled its growth and its streaming services struggled to catch up to the market leaders.
AT&T sold a 30% stake in DirecTV earlier this year, and it recently announced it will merge WarnerMedia with Discovery (NASDAQ:DISCA) (NASDAQ:DISCK) to exit the media market. Those abrupt exits represented much pricier failures than Verizon’s misguided purchases of AOL and Yahoo.
Why did Verizon outperform AT&T?
Verizon outperformed AT&T over the past five years for four reasons. First, it didn’t try to expand into a vertically integrated internet service provider and media company with massive debt-fueled acquisitions.
Second, Verizon’s Fios pay-TV business, which is bundled with its wireline subscriptions, is much smaller than AT&T’s pay-TV business. As a result, Verizon easily offset its wireline and pay-TV declines with the growth of its core wireless business.
Third, Verizon maintained its lead as the country’s largest wireless carrier. AT&T previously ranked second, but fell to third place after T-Mobile (NASDAQ:TMUS) merged with Sprint last year.
AT&T will likely need to increase its spending on new 5G networks and marketing campaigns to catch up. That’s probably why it finally decided to sell a big stake in DirecTV and spin off WarnerMedia.
Lastly, Verizon generates stronger revenue and earnings growth than AT&T if we exclude AT&T’s inorganic gains from DirecTV and Time Warner. Analysts expect Verizon’s revenue and adjusted earnings to both increase about 4% this year. But they expect AT&T’s revenue to rise just 1% and for its adjusted earnings to stay flat.
Why will Verizon keep outperforming AT&T?
Verizon’s weakest link was Verizon Media, which housed Yahoo and AOL. The business struggled to stand out in the crowded advertising market, and the pandemic exacerbated its declines last year.
But after selling most of that business to Apollo, Verizon’s core wireless business will continue to expand as consumers buy more 5G devices. Its smaller wireline business should also benefit from upgrades to higher-speed 800G connections later this year.
AT&T plans to spin off WarnerMedia in mid-2022. But until that happens, its pay-TV business will continue to struggle, its 5G business will still face tough competition from Verizon and T-Mobile, and it will need to invest a lot more cash into WarnerMedia’s film, TV, and streaming media divisions.
When the spin-off finally happens, AT&T plans to cut its dividend to reflect that divestment. That abrupt move will end its 36-year streak of annual dividend hikes, surrender its Dividend Aristocrat title, and likely reduce its forward yield from 6.5% today to about 3%-4%.
Verizon currently pays a forward yield of 4.4%. It’s raised that dividend annually for 14 straight years, and it won’t cut that payout anytime soon.
AT&T is cheaper for obvious reasons
Verizon trades at 11 times forward earnings, while AT&T has a forward P/E ratio of 9. However, AT&T’s stock is cheaper because its business is messier, its growth rates are lower, and its plans for the future are murkier. Both companies are shouldering a lot of debt, but AT&T’s net debt to adjusted EBITDA ratio of 3.1 is still higher than Verizon’s comparable ratio of 2.9. Based on all these facts, I believe Verizon will still easily outperform AT&T over the next five years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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