Better Buy: AT&T vs. T-Mobile

AT&T (NYSE: T) and T-Mobile U.S. (NASDAQ: TMUS) are two of the three companies that will provide 5G service across the U.S. Along with Verizon, they will form an oligopoly in this essential service.

Nonetheless, despite similarities, both companies differ significantly as telecom stocks. Let's look at both companies to see which one offers more potential for investor gains.

These are different companies despite similar offerings

Now that Apple will soon release a new iPhone, millions of Americans will suddenly gain access to 5G wireless service. This will change the way individuals interact with wireless networks as more virtual reality (VR), artificial intelligence (AI), and Internet of Things (IoT) applications will probably run on these devices. Additionally, COVID-19 could speed this adoption as more people choose to work from home.

T Chart

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Although both AT&T and T-Mobile can provide 5G service, they have taken different paths to arrive at this point. AT&T was a landline service provider before entering the wireless business. It also made some investments outside of wireless, such as its purchases of DirecTV and WarnerMedia. This differs from T-Mobile, which has spent its entire history as a wireless provider. T-Mobile grew through mergers and price competition, the latest being the acquisition of Sprint.

Though AT&T has invested tens of billions of dollars over the years to keep up with the changing technology of the industry, the stock has not seen a proportional benefit: It trades at levels it first reached in the mid-1990s.

T-Mobile stock has not existed for that long but has offered superior performance. Since T-Mobile U.S. debuted on the New York Stock Exchange on May 1, 2013, it has risen by more than 630%. AT&T has lost 26% of its value over the same period.

The financials

However, this does not mean T-Mobile remains the better choice. Investors will pay significantly more for T-Mobile, which trades at a forward P/E ratio of about 37, while AT&T sells for less than nine times forward earnings.

Also, AT&T shareholders receive a massive dividend. At $2.08 per share, the dividend payout yields about 7.4%. Additionally, AT&T is a Dividend Aristocrat, having increased its payout for 35 consecutive years. Maintaining that status will soon require a payout hike, so the dividend will probably head higher despite its massive yield. T-Mobile does not offer a payout.

Moreover, T-Mobile has exhibited massive increases in net income in past years. Unfortunately for T-Mobile longs, analysts do not expect earnings to gain much traction in the near term. They predict profits will fall by about 53% this year and grow by 0.5% in fiscal 2021. For AT&T, forecasts point to an 11% decline in earnings this year and a 2% increase next year. Both companies faced impacts from COVID-19. Still, merger costs led to a significantly larger profit decline for T-Mobile.

Wireless telecom network across United States.

Image source: Getty Images.

AT&T or T-Mobile?

Over the long haul, both stocks should trend higher as the 5G oligopoly becomes more indispensable to the tech industry and the economy in general.

However, with both presumably contending with anemic profit growth, investors could experience larger gains in AT&T. Admittedly, it faces challenges such as its failing investment in DirecTV and struggles with WarnerMedia.

Still, AT&T adds the benefit of a low forward P/E ratio along with a massive, rising dividend. Also, since surrendering its Dividend Aristocrat status could erode confidence in the stock, investors can expect further payout hikes.

Despite AT&T's advantages, investors should periodically revisit this question. If T-Mobile can return to double-digit profit growth, it might again become a more lucrative investment. Nonetheless, with both offering modest earnings increases, AT&T appears to provide significantly more value for the money.

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Will Healy owns shares of AT&T. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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