AT&T (NYSE: T) and T Mobile (NASDAQ: TMUS): a story of two telcos. Ten years ago, AT&T attempted to acquire a struggling T-Mobile before those plans collapsed amid an antitrust review. Today, T-Mobile is a revitalized, hugely successful business. It bought rival Sprint last year and its stock is approaching a 52-week high of $ 148.70 at the time of writing. Meanwhile, AT&T shares are resting at around $ 29 a share as the company weaves its way through a mountain of debt accumulated in a wave of entertainment acquisitions.

Can AT&T bounce back? If so, can T-Mobile maintain its success in a highly competitive US telecommunications market? Let’s compare these two telecom titans to determine which is the best investment.

Image source: Getty Images.

The case of AT&T

AT&T is in transition after a difficult 2020. Last year, its revenues fell by more than $ 9 billion from 2019 due to the coronavirus pandemic. This has increased the pressure on the company to do more to manage its massive debt load.

Therefore, new CEO John Stankey, with less than a year on the job, decided to part ways with the expensive entertainment acquisitions DIRECTV and WarnerMedia. The sudden turnaround makes sense. The company needed to focus on its core telecommunications business in the all-important race to deliver 5G wireless networks.

The renewed concentration is bearing fruit. Postpaid customers are the most valuable in the telecommunications industry, and in the first quarter of this year, AT&T announced nearly 600,000 postpaid phone network additions, the highest first quarter result in more than a decade.

This first quarter result is the third consecutive quarter of exceptional postpaid telephone network additions.

A line graph shows the number of postpaid net additions much higher in the last 3 quarters than in the 6.

DATA SOURCE: ARCHIVES OF THE COMPANY AT&T. TABLE BY AUTHOR.

AT & T’s ability to attract customers in the critical postpaid category is associated with near-record churn rates. Since 97% of the US population owns a cell phone, attracting and retaining customers from its competitors is a must for AT&T to increase revenue.

Speaking of which, AT&T saw 2.7% year-over-year revenue growth in the first quarter. The company’s free cash flow, key to financing its high-yield dividend while paying off debt, increased 51%. While first quarter results were strong, AT&T plans to lower its dividend due to its Time Warner business split, which is expected to occur in the middle of next year.

For many investors, AT&T was first and foremost a dividend game. The news of a drop in dividends was not welcome, but investors can still benefit from AT & T’s entertainment bet. The shareholders will receive shares of the new company as part of the demerger.

The strengths of T-Mobile

As AT&T moves away from its entertainment aspirations, T-Mobile’s success in 2020 continues into 2021 with an impressive first quarter. AT&T may have seen strong net additions of postpaid phones in the first quarter, but T-Mobile led the industry with 773,000 net additions.

Its first quarter result followed an exceptional 2020 when T-Mobile led the postpaid phone network additions industry. It also saw its annual revenue grow from $ 45.0 billion in 2019 to $ 68.4 billion in 2020 despite the pandemic, aided by its acquisition of Sprint.

T-Mobile’s strategy for continued success is solid. Like its competitors, T-Mobile is developing its 5G network. But while AT&T had to make a $ 23.4 billion bid at a government auction in February to buy vital mid-range spectrum for its 5G network coverage, T-Mobile only offered. that $ 9.3 billion to supplement what it already has.

Through its merger with Sprint, T-Mobile will have over 70% more mid-band spectrum than AT&T in the coming years. This gives T-Mobile’s 5G network the advantage of coverage and performance at a lower cost.

With its superior 5G network, T-Mobile plans to increase its share in smaller markets and among enterprises, where its current share is less than 10%. T-Mobile expects to nearly double its business customer market share over the next five years as the adoption of 5G ramps up.

The final verdict

AT&T and T-Mobile both have advantages. AT & T’s $ 5.9 billion in free cash flow in the first quarter eclipses T-Mobile’s $ 1.3 billion. But T-Mobile doesn’t have to allocate its free cash flow to a dividend. So what’s the best investment in the long run?

Building a 5G network is capital intensive. This is where AT & T’s debt is a burden. The company’s long-term debt at the end of the first quarter stood at $ 160.7 billion. Meanwhile, T-Mobile’s long-term debt stood at $ 66.4 billion in the first quarter.

T-Mobile has the advantage of 5G spectrum and a solid strategy for continued revenue growth. AT&T is still untangling its media acquisitions and its attractive dividend is expected to decline. Considering these factors, I think it’s safe to say that T-Mobile is the best investment right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.



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