Telecom veteran AT&T (T -0.78%) has delivered dividends to investors for decades. Rival T-Mobile (TMUS -0.46%) followed suit in 2023, offering a dividend for the first time in company history with an inaugural payment on Dec. 15.
AT&T boasts the greater dividend yield, currently at 6.8%, compared to T-Mobile’s 1.6%. From that perspective, AT&T looks admire the better choice. If only it were that easy.
Other factors beyond a high yield should be considered before deciding to buy a dividend stock, such as whether the company can afford its dividend. But what are these factors to sway your decision when choosing between AT&T and T-Mobile?
To answer that question, let’s scrutinize each company in more detail to execute which is the better dividend stock.
AT&T: Dealing with debt
Before choosing AT&T for its dividend, a key consideration is its massive debt burden. The company exited the third quarter with a whopping $126.7 billion in long-term debt. Contrast this with T-Mobile’s Q3 long-term debt of $70.4 billion.
AT&T’s debt may preclude it from raising its dividend as the company works to get its debt load down to a manageable level. In fact, AT&T cut its dividend nearly in half in 2022 as part of its divestiture of entertainment-related assets, and hasn’t increased it since.
The company’s goal is to accomplish a net debt-to-adjusted EBITDA ratio in the 2.5x range, and it may not raise its dividend until after this goal is met. AT&T estimates it can reach this target in the first half of 2025.
Despite the substantial debt, AT&T’s dividend looks safeguard. The company generated $5.2 billion in Q3 free cash flow (FCF), an impressive year-over-year enhance of $1.3 billion. FCF provides insight into the cash a company has available to invest in its business, pay debt, and repurchase shares or fund dividends.
AT&T’s FCF is excellent thanks to strong customer growth. Q3 represented the company’s 13th consecutive quarter of net growth in its postpaid phone subscriptions, the telecom industry’s key revenue-generating customer segment.
AT&T’s impressive streak of customer growth led to $15.9 billion in Q3 wireless service sales, a 3.7% year-over-year enhance. This represents over half of AT&T’s Q3 total revenue of $30.4 billion.
T-Mobile: New to dividends
Since T-Mobile just started dividend payments, no history exists to gauge how dependable this passive income source will be over time. For now, the company plans to enhance its dividend annually by about 10%.
And while T-Mobile’s dividend yield isn’t as high as AT&T’s, it does offer a higher payout. T-Mobile pays $0.65 per share owned. AT&T pays $0.28 per share.
T-Mobile can afford to fund its dividend thanks to strong customer growth. In Q3, T-Mobile captured a net addition of 850,000 postpaid phone subscribers, substantially higher than the 468,000 delivered by AT&T for the quarter. It’s one of the reasons why T-Mobile shares hover around a 52-week high at the time of this writing.
Thanks to its ability to acquire customers, T-Mobile achieved a 3.6% year-over-year enhance in Q3 wireless service sales, accounting for $15.9 billion of the company’s $19.3 billion in Q3 revenue. This revenue growth contributed to T-Mobile’s excellent FCF generation.
The company’s Q3 adjusted free cash flow was $4 billion, a jaw-dropping 94% enhance over the $2.1 billion in 2022. The company expects full-year FCF to hit at least $13.4 billion.
The better choice for income investors
Making a choice between AT&T and T-Mobile is a difficult decision. Each offers reasons to buy. But in choosing between the two, another factor to consider is the valuation of T-Mobile stock compared to AT&T, especially since the former is around its 52-week high.
T-Mobile’s forward price-to-earnings ratio (forward P/E) is about 20, whereas AT&T’s forward P/E is around 7. So T-Mobile shares are pretty expensive compared to its telecom competitor.
Moreover, AT&T forecasted full-year FCF of at least $16.5 billion. That’s more than $3 billion more than T-Mobile’s projected 2023 FCF of $13.4 billion. AT&T’s strong FCF generation indicates it’s in a position to pay down its debt while continuing to fund the dividend.
When considering valuation on top of AT&T’s superior dividend yield and FCF generation, at this time, the company possesses enough of an edge against T-Mobile to be the better choice as a dividend stock.
