Best Telecom Stock: AT&T vs. Verizon

The telecommunications sector appears to be offering respite from this year’s volatile stock market storm, as companies operating there have a track record of reliable earnings and regular dividend payments. But two of the biggest players in the telecommunications sector, Verizon (VZ -0.39%) and AT&T (T 0.77%)prove that even the public’s dependence on mobile devices does not protect a company from macroeconomic factors such as inflation.

Both companies have given investors a hard time this year, albeit for different reasons. Both have seen stock prices fall in recent weeks, with Verizon’s stock price hitting a 52-week low on Sept. 8, and AT&T’s stock price approaching last December’s low.

So is now a good time to buy shares in either of these beat stocks? If so, is it a better buy?

The dilemma of acquiring Verizon customers

Verizon’s stock price fell on a disappointing second-quarter earnings report, with revenue of $33.8 billion, which was essentially flat year-over-year . But that’s not the worst news.

Postpaid customers are the most valuable in the telecommunications industry, and in this area, Verizon’s postpaid phone network additions in Q2 totaled just 12,000. Compare that to 275,000 last year in Q2. and to 173,000 in the second quarter of 2020 despite the onset of the pandemic.

Weak customer acquisitions forced Verizon to trim its 2022 revenue outlook. The company’s wireless revenue, which was $18.4 billion of the $33.8 billion in total second quarter, are expected to rise 9-10% year over year, but the company now estimates between 8.5% and 9.5% increase.

A confluence of factors has driven customers away. Verizon’s costs rose, so the company began raising prices in the second quarter. At the same time, pandemic-related stimulus funding ended and customers fled for better deals from the competition.

But it’s not all bad news. Verizon’s consumer business grew revenue 10% in the first half of 2022, thanks to the company’s acquisition of TracFone and customers switching to 5G-enabled devices. The growth of Verizon’s consumer division is crucial as it generated $50.9 billion of the $67.3 billion in revenue generated in the first half of this year.

AT&T’s mixed results

While Verizon struggled to acquire customers, AT&T experienced the opposite. Its second-quarter postpaid net additions of 813,000 were the highest for a second quarter in more than a decade.

AT&T’s high number of acquisitions, along with customers upgrading to 5G-enabled devices, fueled mobile revenue growth of 5.2% in the second quarter year-on-year to $19.9 billion . This success helped drive overall second-quarter revenue to $29.6 billion, a 2.2% year-over-year increase including divested businesses.

But AT&T said costs rose about $1 billion more than expected. Meanwhile, some customers began having trouble paying their bills on time, resulting in $1 billion in late payments. These unexpected factors contributed to AT&T cutting its 2022 free cash flow (FCF) forecast by $2 billion, a key part of its dividend payout.

The drop in FCF was bad news, especially after the company’s massive dividend cut of nearly 50% earlier this year sent the stock price plummeting. AT&T’s status as an attractive dividend stock is understandably questionable now.

The best telecom stock shot

Despite disappointing second-quarter results, Verizon and AT&T are each benefiting from customers transitioning to 5G networks. Both saw strong equipment sales as customers adopted 5G-enabled devices, a sign that this transition is taking place successfully. In the long term, the move to 5G will serve as a tailwind for both.

So between the two, what is the best investment? Although AT&T’s number of customer acquisitions far exceed Verizon’s, Verizon has generated more revenue. In the first half of 2022, Verizon’s $67.3 billion in revenue eclipsed AT&T’s $59.4 billion.

And while both have a dividend yield of around 6%, Verizon offers the more stable payout. On September 6, it increased its dividend for the 16th consecutive year.

But the U.S. telecommunications market is saturated, which means companies must take customers from competitors to grow. AT&T succeeds here at the expense of Verizon.

Additionally, while Verizon cut its wireless revenue forecast for 2022, AT&T raised its wireless revenue estimate from 3% to growth of between 4.5% and 5%. Considering these factors, AT&T currently looks like the best telecom stock. That said, is now a good time to buy stocks?

With both companies raising prices in the second quarter and inflation continuing to affect the economy, customer acquisition trends could change in the next quarter. Investors may want to wait for third quarter results to assess trends before buying stocks.

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