I’d been a Verizon (NYSE: VZ) wireless customer for as long as I can remember. My long-standing relationship with the telecom giant was one of the many reasons I initially bought its stock.
While I recently switched my service to rival AT&T (NYSE: T), I don’t plan to swap stocks. I still think Verizon is a better dividend stock, which is why I recently added to my position again.
A better income stream
Verizon and AT&T offer attractive dividend yields these days. At first glance, they’re pretty comparable. Verizon yields 6.7%, while AT&T’s payout is 6.5%. Even though Verizon has a slightly higher yield, that’s not what gives it the edge over its peer. The main driver is that Verizon has more financial flexibility, which allows it to steadily increase its dividend.
The company most recently raised its dividend by around 2% last September. That was its 17th straight year of dividend growth, the longest current streak in the U.S. telecom sector.
While Verizon’s payout has been steadily heading higher, AT&T’s dividend has gone in the opposite direction. In early 2022, the company slashed its dividend in half following the spinoff of its media division, WarnerMedia, which it merged with Discovery to create Warner Bros. Discovery. The telecom company needed to reset its dividend to reflect its lower post-spin earnings and to retain more cash for debt reduction.
Debt remains an issue for AT&T. While the company’s strong free cash flow last year enabled it to reduce its leverage ratio from 3.2 to 3.0, it’s well above Verizon’s level. Its rival ended 2023 with a 2.6 leverage ratio, down from 2.7 at the end of 2022. Verizon was also able to use its strong and growing post-dividend free cash flow to strengthen its balance sheet. Verizon’s lower leverage ratio is why it has a higher credit rating (A-/BBB+/Baa1 versus BBB+/BBB/Baa2 for AT&T).
Further along
Verizon and AT&T have similar capital allocation priorities. They’re investing heavily to enhance their 5G and broadband networks while paying dividends and strengthening their balance sheets. However, Verizon is further along in its deleveraging, which puts it closer to its goal of eventually returning even more cash to investors. The company expects its capital spending to be in a range of $17 billion to $17.5 billion this year. That’s down from $18.3 billion in 2023 and $23.1 billion in 2022. And it’s allowing the company to produce more free cash flow to pay a growing dividend and strengthen its balance sheet.
The company’s long-term target is to get its leverage ratio down to a range of 1.75 to 2.0. However, it plans to start returning more cash to investors beyond its growing dividend by resuming share repurchases once leverage dips below 2.25. With capital spending coming down and free cash flow rising, Verizon is getting closer to that inflection point.
AT&T is also making progress toward strengthening its balance sheet. Capital spending should decline to a range of $21 billion to $22 billion this year, down from $23.4 billion in 2023. That should enable the company to produce more free cash — $17 billion to $18 billion in 2024, up from $16.8 billion last year. While that will give it more cash to reduce debt, AT&T has a lot further to go until it reaches Verizon’s lower leverage level. It probably won’t be in the position to start increasing its dividend anytime soon.
Verizon is the better option for income investors
From a customer’s standpoint, AT&T is a better option for me. However, from an investor’s point of view, Verizon stands out as the better company. It offers a higher-yielding dividend that should continue growing. It also has a stronger balance sheet. The company should supply me with a sustainable and steadily rising income stream, which is something I probably wouldn’t get anytime soon if I swapped its stock for AT&T.
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Matt DiLallo has positions in Verizon Communications. The Motley Fool has positions in and recommends Warner Bros. Discovery. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Even Though I Recently Switched to AT&T, I Still Think Verizon Is a Better Dividend Stock was originally published by The Motley Fool