AT&T (NYSE: T) and Verizon (NYSE: VZ) have been popular income stocks for decades. Both emerged in the era of landlines, supporting dividends through stable businesses. Even as AT&T and Verizon pivoted into wireless and broadband internet services, they increased their payouts over time.
However, staying competitive against one another and the rising threat of T-Mobile left both companies with massive debt loads. That obligation led to AT&T slashing its payout in 2022. In contrast, Verizon maintains a streak of payout hikes.
Companies have free reign to adjust payout levels at any time. Verizon’s annual payout hikes might make it the more desirable dividend, but its need to pay down debt increases the odds of a dividend cut.
Thus, the question for investors is whether AT&T’s lower payout makes it a better dividend stock, or should they stay with Verizon? Let’s take a closer look.
How the dividends compare
At first glance, AT&T looks like the weaker dividend stock. The company walked away from a 35-year history of payout hikes in 2021, then slashed its dividend by just under 50% to $1.11 per share annually the next year. This gives it a dividend yield of 5.6% at current prices.
In contrast, Verizon has built a 17-year history of payout hikes. Also, since ending such a streak can diminish confidence in a stock, such companies tend to continue the annual payout hikes. That has led to a yearly dividend of $2.66 per share, a cash return of 6.4% at current prices.
Although Verizon offers a higher return, both dividends far exceed the S&P 500 average of 1.3%. Also, both come at a significant cost to their companies.
AT&T spends just over $8 billion per year to maintain its dividend. Free cash flow was $7.7 billion in the first half of 2024 and $11.6 billion in the last two quarters of 2023, for a total of $19.3 billion in free cash flow over the 12 months.
In Verizon’s case, its higher yield comes with a higher cost. It spends just over $11 billion annually to cover the cost of its payout. Still, free cash flow closely matched AT&T, with $8.5 billion in the first two quarters of 2024 and $10.8 billion in the last half of 2023.
That means that Verizon coincidentally also generated $19.3 billion in free cash flow over the trailing twelve months. It also implies that Verizon can generate the cash needed to maintain its payout while leaving cash free for other purposes.
Financial challenges
Unfortunately for both companies, they also need to generate enough free cash flow to service and, ideally, reduce their debt burdens.
As of the end of the second quarter of 2024, AT&T claims just under $131 billion in total debt, slightly above the $119 billion the company holds in stockholders’ equity.
Despite the apparent strain on the balance sheet, AT&T’s debt stood at over $143 billion in the year-ago quarter, meaning it eliminated $12 billion. Also, it has $5.2 billion of that debt maturing over the next year. At that rate, it could retire that debt without the need for refinancing.
In contrast, Verizon carries a higher absolute and relative debt burden. It holds more than $149 billion in debt when its stockholders’ equity is a mere $98 billion.
Moreover, the total debt did not fall significantly, dropping from just under $153 billion in the year-ago quarter. Additionally, its debt maturing in one year stands at more than $22 billion. At its current pace, it will probably have to refinance most of that obligation, likely at higher interest rates.
Which is the safer dividend?
When comparing the two companies, AT&T appears to offer a safer dividend.
Admittedly, AT&T stock offers a slightly lower dividend yield. Also, since it does not currently increase its payout yearly, a dividend cut would probably hurt its stock less. Nonetheless, AT&T maintains its dividend while significantly reducing its debt, meaning it probably does not need to slash its payout.
In contrast, Verizon’s situation is more precarious. While it can technically afford its dividend, it has a higher debt burden relative to its stockholders’ equity and has reduced that debt more slowly. Assuming it has to refinance maturing debt, the pressure to follow AT&T’s lead and slash its payout could prove too difficult to resist.
Ultimately, income investors tend to be more risk-averse. Considering the debt situation of each company, they probably face less risk going with AT&T.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
AT&T or Verizon: Which Stock Offers the Safer Dividend? was originally published by The Motley Fool
