Considering that both AT&T and Verizon are significant components in a number of investor’s income portfolios, the question of whether one is better than the other has been under debate for a long time now. Considering that both companies have similar numbers for free cash flow and have invested equal amounts of capital back into the business in recent years, it is clear where both the correlation and uncertainty originates.
Over the last five years, AT&T has managed to generate slightly higher free cash flow, something that is reflected in its marginally greater enterprise value. However, both AT&T and Verizon trade at comparable normalized cash flow yields, so any determination on which is the better option for an investor is hard based simply on cash flow valuation.
The similarities do not end there, as the companies share comparable figures in other valuations, with both trading at close to 12.5x expected earnings as well as at close to7x forward EV/EBITDA. Both companies have also been investing in infrastructure build-outs and total capital expenditure for each is roughly $100 billion, with AT&T coming out on top by a hair.
Who to Choose
Despite the similarities, AT&T edges marginally ahead as the better option of the two, at least for the moment. The company’s is expected to grow earnings, and is less likely to blindside its investors with surprises in the short term. Verizon however, has a more direct strategy, and in a lot of ways, this is exactly what makes it more opaque with results that are somewhat harder to predict.
Looking at the projected earnings curve, Verizon shows more varied analyst opinion than AT&T. For example, next year’s earnings estimate for Verizon varies between $3.49 and $4.46 per share, which is considerably wider than the same estimate for AT&T’s of $2.61 to $3.10 per share. The same thing can be seen with the options market, where LEAPS for Verizon bring significantly more premium, which indicates potential higher underlying volatility. In the end, it might just be personal preference that is the deciding factor.