Should Investors Buy AT&T Stock Instead of Verizon Stock? | T Stock Analysis | VZ Stock Analysis
Summary
Parkev states that investors seeking passive income often consider Verizon and AT&T for their appealing dividend yields. He emphasizes that buying a dividend stock requires more than just looking at the yield, as stock price fluctuations can nullify or even enhance the dividend's impact. Parkev evaluates the companies' organic revenue growth, profitability, return on capital, and valuation metrics.
He notes that both companies operate in saturated markets, leading to low single-digit organic revenue growth, which is to be expected. They rely on adding services like tablets, accessories, and insurance to increase average revenue per customer. Profitability has improved for both, with AT&T's operating margin rising from 17% to 21% and Verizon's from 21% to 22.7%, partly due to the effective use of artificial intelligence.
A critical concern for Parkev is the companies' inefficient capital allocation. Despite requiring massive, multi-billion dollar investments for network upgrades (like 5G and the upcoming 6G), neither company has shown great effectiveness in deploying capital. Verizon's Return on Capital (ROC) recently dropped from around 12% to 6%, falling below its weighted average cost of capital, while AT&T's ROC stood at 8.11% and rarely exceeded 12% over the decade. This poor capital efficiency, combined with slow growth and saturated markets, means these are not premium companies and are rightly traded at a discount compared to the S&P 500 average.
Parkev's Discounted Cash Flow (DCF) analysis suggests both stocks are undervalued. He calculated a fair value of $34.60 for AT&T, significantly above its current market price of $25. For Verizon, his calculated fair value is $55, compared to its current market price of $47. While both appear undervalued, AT&T shows a greater discount.
Parkev concludes that while both are good investments and investors could buy both, if forced to choose one, AT&T has a slight edge due to its greater undervaluation.
Mentioned Stocks
Reasoning: Parkev rates Verizon as a buy, noting its attractive dividend yield of 5.9% (last 12 months), which is better than 10-, 20-, or 30-year US Treasury bonds. The company shows solid, albeit low single-digit, organic revenue growth and improved operating margins (from 21% to 22.7%). However, Parkev highlights concerns regarding Verizon's inefficient capital allocation, with its Return on Capital recently dropping from ~12% to 6%, falling below its weighted average cost of capital. Despite this, his Discounted Cash Flow (DCF) analysis suggests a fair value of $55, compared to a current market price of $47, indicating undervaluation. Parkev considers it a good option for passive income but sees AT&T as having a slight edge.
Reasoning: Parkev rates AT&T as a buy, citing its attractive dividend yield of 4.4%. Despite divesting a significant part of its business, AT&T achieved low single-digit organic revenue growth and improved its operating margin from 17% to 21%. Parkev expresses concern about the company's Return on Capital, which stands at 8.11% and has rarely exceeded 12% over the decade, indicating inefficient capital allocation for an industry requiring massive investments. However, his Discounted Cash Flow (DCF) analysis calculates a fair value of $34.60, significantly above the current market price of $25, suggesting substantial undervaluation. Parkev considers AT&T the better stock to buy when comparing it to Verizon, giving it a slight advantage.