After years of competing for cellphone customers, telecom behemoths AT&T and T-Mobile are now vying for the cash of dividend investors.
Compared to T-Mobile’s newly instituted 1.6% payout, AT&T’s 6.8% dividend yield is far superior. But there’s more to dividend investing than just looking for the greatest yields.
Before choosing which telecom giant is the best income investment, you should consider factors such as payout reliability, growth potential, cash flow creation, valuations, and more.
Comparing AT&T vs T-Mobile reveals that each company has advantages that may entice various types of investors. In order to help dividend seekers make an informed decision, we have provided a comprehensive analysis of the information they require.
| Factor | AT&T (NYSE: T) | T-Mobile (NASDAQ: TMUS) |
|---|---|---|
| Dividend Yield | 6.75% | 1.6% |
| Debt Situation | Massive debt of $126.7 billion (Q3) | Long-term debt of $70.4 billion (Q3) |
| Dividend History | Cut dividend in 2022, aiming for debt reduction | New to dividends, plans 10% annual increase |
| Free Cash Flow (Q3) | $5.2 billion, strong customer growth | $4 billion, substantial YoY increase |
| Customer Growth (Q3) | 13th consecutive quarter of net growth | Net addition of 850,000 postpaid phone subscribers |
| Wireless Service Sales (Q3) | $15.9 billion (3.7% YoY increase) | $15.9 billion (3.6% YoY increase) |
| Forward P/E Ratio | Around 7 | Around 20 |
| Projected 2023 FCF | At least $16.5 billion | $13.4 billion |
| Valuation Consideration | More favorable (lower) | Expensive (higher) |
| Overall Assessment | Superior dividend yield, strong FCF, but high debt | New to dividends, strong growth, higher valuation |
AT&T’s Blockbuster Yield Overshadowed by Debt Burden
It is undeniable that AT&T has become an income-generating juggernaut with nearly 40 years of dividend increases. Nevertheless, investors seeking income continue to be concerned about the company’s heavy debt burden.
In comparison to T-Mobile’s $70.4 billion in long-term debt as of Q3 2022, AT&T’s enormous $126.7 billion was much heavier. Thus, AT&T is unable to pursue growth prospects or increase its payout rapidly while it concentrates on deleveraging.
Actually, after the WarnerMedia spin-off last year, AT&T cut its dividend by nearly half to reduce debt. The distribution remains unchanged as management is committed to reducing the net debt-to-EBITDA ratio to 2.5x by 2025. Only then will dividends be hiked again.
With robust growth in wireless subscriptions, AT&T’s current yield of 6.8% appears secure for the time being. In addition to a 3.7% increase in yearly service revenue to $15.9 billion in Q3 2022, the telecom giant has produced 13 consecutive quarters of postpaid phone client growth.
Also, AT&T’s free cash flow was $5.2 billion in the most recent quarter, up a substantial 28% year over year. This allowed the corporation to pay its dividends twice over and also invest in 5G network expansions. Even though AT&T has a lot of debt, its yield should still be appealing to income investors as long as cash generation stays strong.
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T-Mobile’s New Dividend Allures Growth and Income
T-Mobile is a dividend newbie, therefore it doesn’t have the same track record of consistent payouts as income giants like AT&T. Still, its first dividend paid out about 1.6% right away, and it plans to increase that to 10% a year from now on.
T-Mobile also distributes $0.65 per share quarterly, which is twice as much as AT&T’s $0.28 payout. Although T-Mobile’s yield is lower than AT&T’s, the larger dividend amount provides them the advantage.
T-Mobile, like its competitor, is able to fund dividends because to significant growth in wireless subscribers. In Q3 2022, the “Un-carrier” continued to dominate the market, adding 850,000 postpaid phone users, much outpacing AT&T’s 468,000 additions.
As a result, T-Mobile’s quarterly sales from wireless services increased by 3.6% year-over-year to $15.9 billion. The cash pile was further bolstered by adjusted free cash flow, which surged 94% year-over-year to $4 billion, with guidance aiming for over $13 billion in 2022.
Investors seeking an unusual combination of income and payout increase may find T-Mobile appealing, given management’s 10% annual dividend growth plan. Additionally, the guarantee that those increasing dividends will be supported is provided by the accelerating cash flows.
Valuations, Cash Generation Give AT&T the Nod
Differences in valuations and cash creation pit T-Mobile’s growthier payout against AT&T’s more established revenue stream.
Compared to AT&T’s multiple of only 7, T-Mobile trades at a significant premium, with its forward P/E hovering at 20. The fact that AT&T is floundering suggests that investors are pricing in T-Mobile’s growth for years to come.
Also, free cash flow for 2022 is projected to be $13.4 billion by T-Mobile. Though still amazing, it’s almost $3 billion less than AT&T had predicted, which was $16.5 billion. This shows that AT&T’s ability to deleverage and dividend coverage remains strong.
For income investors, AT&T appears to be the better option right now due to the large valuation differential and larger cash flows. With a considerably higher 6.8% forward yield, investors get significantly more for their money when they invest in AT&T’s cash payouts.
Considering the rapid global rollout of 5G networks expected over the coming decade, it would be remiss to ignore T-growth Mobile’s future. If T-Mobile’s management is successful in increasing payouts, the company could challenge AT&T’s dividend if the value gap narrows.
Regardless of its slower growth potential, AT&T is the undisputed leader for investors that prioritize stable cash flow and maximizing current income creation.
The telecom relic can continue to provide a healthy return to investors for years to come, with management predicting a 2-3% increase in earnings every year in the midst of 5G rollouts. It turns out that sometimes the slow and steady way is the best way to go.