In most cases, investors are interested Verizon Communications (NYSE:VZ) And AT&T (NYSE:T) are generally most interested in their dividends. Neither company is in strong growth mode and both stocks have relatively high returns.
So let’s look at which stock might be best for income-focused investors.
Current dividends
Both Verizon and AT&T have similar dividend yields. Verizon currently pays a quarterly dividend of $0.665 per share, yielding about 6.3%. AT&T, meanwhile, pays a quarterly dividend of $0.2775 per share, yielding about 6.4%.
However, Verizon has been the far more consistent dividend grower. When the company increased its dividend last September, it marked the 17th consecutive year the company had increased its payout. During this period, the quarterly dividend increased from $0.43 in 2007 to the current dividend.
AT&T, on the other hand, has almost halved its 2022 dividend from $0.52. It hasn’t increased it since the cut. However, the dividend cut was not an isolated incident. In connection with the sale of its shares, Warner Media was spun off Warner Bros. Discovery (NASDAQ:WBD).
The best way to determine the current safety of any company’s dividends is to look at how well its cash flow covers its dividends.
In 2023, Verizon generated operating cash flow of $37.5 billion. At the same time, just over $11 billion in dividends were paid out. This corresponds to a dividend coverage ratio of 3.4. AT&T, meanwhile, generated $38.3 billion in operating cash flow in 2023. The company paid out $8.1 billion in dividends. This corresponds to a dividend coverage ratio of 4.7.
Both companies’ dividends are very well covered at this point. This leaves both of them with enough cash flow to invest in their company, pay off debt or even buy back shares.
The other factor that can affect dividend payouts is debt and leverage. In order to maintain dividends, companies must keep their debt levels within reasonable limits. Verizon ended the year with $148.6 billion in debt and a leverage ratio (net debt/consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)) of 3.1. For unsecured debt, the commonly cited metric, the leverage was 2.6x. Verizon’s long-term goal is to achieve 2x leverage on its unsecured debt.
AT&T ended 2023 with net debt of $130.6 billion. The leverage at the end of the year was three times that. The company expects to achieve 2.5x leverage by the first half of 2025.
Although both companies want to reduce their leverage, their current cash flows allow them to comfortably pay their dividends while paying down their debt.
Looking for growth
AT&T outperformed Verizon on the growth front in 2023, increasing its total revenue by 1.4% to $122.4 billion. Verizon, on the other hand, reported a 2.1% decline in revenue to $134 billion. In the key wireless segment, AT&T increased its revenue by 4.4%, while Verizon increased its wireless revenue by 3.2%.
AT&T added 1.7 million new postpaid wireless customers in 2023, while also adding 1.1 million AT&T Fiber customers. Verizon added 2 million new postpaid wireless customers and nearly 1.2 million retail broadband customers.
Looking forward, AT&T expects wireless revenue growth of about 3% in 2024, while Verizon expects wireless revenue to grow between 2% and 3.5%. AT&T expected adjusted EBITDA growth of about 3%, while Verizon forecast adjusted EBITDA growth between 1% and 3%.
Both companies are currently expecting moderate sales growth.
AT&T displaces Verizon
In terms of dividend yield, dividend coverage ratio, balance sheet strength, and revenue growth, AT&T is just ahead of Verizon in all respects, although the differences are generally small. However, from a valuation perspective, AT&T is clearly the cheaper stock, trading at a forward P/E ratio of under 8x versus over 9x for Verizon. The valuation gap could be due to AT&T’s previous dividend cut, but it has narrowed.
Given its cheaper valuation and slightly better metrics, AT&T currently appears to be a better dividend stock buy compared to Verizon.
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Geoffrey Seiler holds positions at Warner Bros. Discovery. The Motley Fool has positions in and recommends Warner Bros. Discovery. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Better high-yield telecom dividend stock: Verizon or AT&T? was originally published by The Motley Fool