Personal Finance

Better Buy: AT&T Inc. vs. Verizon Communications Inc.

Two sets of hands competing in a tug of war.

When it comes to telecom stocks, this is the ultimate battle. In AT&T (NYSE: T) and Verizon (NYSE: VZ) , we have a combined market share of over 65% of America's wireless phone subscribers and two battle-tested dividend payers.

But which is the better stock to buy today, especially for retirees looking for safe and reliable income? We can't answer that question with 100% certainty, but we can approach the question from three different angles in an attempt to get an idea for what we're most comfortable with.

Two sets of hands competing in a tug of war.

Image source: Getty Images.

Sustainable competitive advantages

This is, in my humble opinion, the most important thing for any beginning investor to understand. A company's sustainable competitive advantage -- often referred to as its "moat" -- is the most important thing to understand. In its simplest form, a moat is what keeps customers coming back year after year and keeps competitors at bay for decades.

When comparing a telecom to another stock, the most important moat comes from enormous barriers to entry. It costs billions to build out the infrastructure necessary to provide service to Americans all over the map. And those billions must be spent before the first customer is signed up.

But because this competition pits the American wireless duopoly against itself, that's no longer a differentiator. Nor is market share a key differentiator. According to Statista, Verizon owns 34.9% of the market, while AT&T clocks in with 32.4%. Verizon's decision to buyout Vodafone 's share of Verizon Wireless helped to solidify this position.

And it's important to note that both of these players are transitioning from being traditional telecoms to owning content and content platforms. AT&T has merged or announced mergers with both Time Warner and DIRECTV. Verizon has done the same with AOL, among others. These are major moves that will help put a moat around both companies, but, again, they don't really help us differentiate the two.

Winner = Tie

Financial fortitude

Telecom investors can't be blamed for wanting cash to be returned to them in the form of dividends. But there are limits to paying out dividends. Tough economic times hit, and when they do, it's important to have cash on hand. Given the debt-heavy nature of telecoms, this is especially important.

Here's how AT&T and Verizon stack up in terms of financial fortitude. And remember, AT&T is valued at roughly 25% larger than Verizon.

Company Cash Debt Net Income Free Cash Flow
AT&T $5.8 billion $114 billion $13.0 billion $16.9 billion
Verizon $3.5 billion $105 billion $13.6 billion $5.7 billion

Data source: Securities and Exchange Commission filings. Cash includes cash, short-, and long-term investments.

There are a few caveats here. Obviously, both have huge debt loads versus not too much cash. That's pretty common with telecoms. And the acquisitions of Yahoo!, AOL, Verizon Wireless, DIRECTV, and Time Warner all help add to the debt levels of the duo.

But when it comes to cash flow, there's a clear winner: AT&T. Verizon just reported a pretty brutal quarter that saw free cash flow come in at negative $600 million. While I don't expect Verizon to allow this trend to continue for long, it allows us to declare a clear winner for now.

Winner = AT&T


Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Company P/E P/FCF PEG Ratio Dividend FCF Payout
AT&T 15 15 1.7 4.7% 66%
Verizon 13 36 3.2 4.7% 161%

Data source: SEC filings, E*Trade. P/E represents figures from non-GAAP earnings.

Here again, we have a clear winner. Verizon's low free cash flow once again rears its ugly head into the equation. Over the past 12 months, the company has paid out more in dividends than it has been able to keep in its pockets. AT&T, on the other hand, has a very healthy dividend right now.

Those 4.7% yields, while equivalent on paper, are of very different sustainability levels.

Winner = AT&T

The winner is... AT&T

So there you have it. AT&T is the clear winner. While I have no doubt that Verizon's numbers will eventually improve, AT&T cash flow and dividend payment are in a much healthier place right now -- and its stock seems to be offering a fair value given all of the information we have. Retirees looking for solid dividend stocks would do themselves a favor to investigate AT&T even further.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Time Warner 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.

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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