Verizon and AT&T: One is a high-yield value, the other a trap

Key Points

• Verizon and AT&T present deep value and high yield for income investors, but are they value traps?
• AT&T issued weak guidance for earnings impacted by costs.
• Verizon produced growth in critical areas and is growing its dividend: analysts raise targets. 

Verizon Communications Inc. NYSE: VZ and AT&T Inc. NYSE: T have presented value and yield to investors for years. 

However, they failed to sustain interest in their stocks, creating a drag on portfolio value that only recently ended. The question today is if these blue chip telecoms have become value traps or if they can sustain the rebounds that began in Q4 2023. 

If so, these stocks present deep value and high yields of over 6%, with an outlook for capital growth. 

One outlook brightens, and another dims for the telecom giants

AT&T and Verizon had decent quarters, but AT&T is showing earnings weakness that dimmed the outlook for the year. It had a better quarter regarding revenue, with the top line up 2.2% compared to Verizon's negative 0.6%. 

However, margin weakness left earnings below consensus, impacted by impairments and costs that will persist into Q1 2024. Analysts fear the company will face headwinds for the remainder of the year and lose momentum in the race for 5G dominance. 

Conversely, Verizon produced significant growth in key areas, suggesting it is building momentum. The company reports strong growth in its consumer and wireless segments, with fixed wireless subscribers of over 3 million and on track to hit long-term targets. Earnings were as expected; the news was approved by analysts and called "healthy" by ISI Evercore analyst Vijay Jayant. 

Verizon is a value; AT&T is wait and see

Both companies produced solid results in Q4, but a critical difference makes one a value today and another an option for another time. That difference is the guidance that sent a message to investors. On the one hand, there is Verizon, which guided in alignment with analysts' forecasts and AT&T, which did not. Both expect top-line growth in the 3% range, but AT&T earnings will fall short of consensus for a critical reason. 

AT&T earnings will fall short because of the same headwinds experienced in Q4 2023. On top of this, the company aims to increase its CAPEX spending, further impacting the FCF and capital return outlook. The increase is to help build out its network, a good idea given Verizon's commanding presence in 5G. 

The company's reliability rating is far better, and its coverage is more than double, which provides significant leverage for the consumer rebound. The takeaway is that AT&T is in a game of catch-up that will cost investors in the near term and may not be enough in the long. 

Analysts' activity is telling. Marketbeat.com tracked three revisions following Verizon's release, including a double-upgrade from Hold to Outperform and three boosted price targets forecasting 1,000 basis points of upside. AT&T analysts see more upside in the stock than they do for Verizon but may not have cause to keep their targets in place. If they begin to lower them, it will provide another headwind for the market. 

Verizon's dividend grows

AT&T and Verizon pay similar yields. AT&T is slightly better for slightly lower relative cost, but only one distribution is growing. AT&T dealt its market a blow by cutting the dividend in 2022, and there is no expectation for a return to distribution growth. That's a headwind. Conversely, Verizon can sustain its two-decade history for at least a few more years. It is on track to become a Dividend Aristocrat by the end of the decade, another tailwind for the stock price. 

You can see the operational and dividend quality disparity in the price action. Both stocks bottomed in 2023, but AT&T is struggling with resistance at the mid-point of its range while Verizon is testing the top of its. Both may remain range-bound, but Verizon has a far greater chance of completing its reversal and trending higher over the long term. The critical level is $42.50.