Better Telecom Stock: AT&T vs. T-Mobile

Uncertainty over the future of the U.S. economy has roiled the stock market, causing many stocks to sink. In this environment, telecom stocks present a potential reprieve. Society's dependence on mobile devices makes the telecom sector a stable area to invest in.

Two of the biggest companies in the telecom industry are AT&T (NYSE: T) and T-Mobile US (NASDAQ: TMUS). Both saw shares surge nearly 60% over the past 12 months through the week ended March 21. With AT&T and T-Mobile stocks performing well, does one stand out as the better telecom investment?

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AT&T's "new era of growth"

AT&T shares have done well of late, hitting a 52-week high of $27.97 in March. This is thanks to the conglomerate's recent business performance after a few tumultuous years spent transitioning away from a failed entertainment empire.

The company's mobile service sales grew an excellent 3.5% year over year to $65.4 billion in 2024. This area of its business is critical, since it accounted for the bulk of the firm's $122.3 billion in 2024 revenue. AT&T expects mobile services to continue seeing revenue rise, forecasting at least 2% growth in 2025.

Not only that, CEO John Stankey declared AT&T was entering a "new era of growth," as management estimated mobile service revenue would keep growing by 2% to 3% per year through 2027.

This will lead to free cash flow (FCF) growth of $1 billion annually through 2027, according to AT&T management. In 2024, FCF was $14.1 billion. FCF is a key metric since it indicates the cash available to invest in the business, pay down debt, repurchase stock, and fund dividends.

Dividends are one of the factors that make AT&T an attractive investment. Shares sport a beefy dividend yield of 4.1% at the time of writing. With FCF projected to grow over the next few years, its dividend looks dependable.

T-Mobile's strong business performance

Like AT&T, T-Mobile shares achieved a 52-week high in March, reaching $276.49. The company is firing on all cylinders, as 2024 revenue rose 3.6% year over year to $81.4 billion. Total service sales were $66.2 billion, a strong 4.6% year-over-year increase.

T-Mobile's 2024 adjusted free cash flow rose 25% year over year to $17 billion. It expects to deliver FCF of at least $17 billion in 2025 as well. This indicates that its dividend, currently yielding 3.5%, is secure. T-Mobile's success was fueled by its ability to attract customers. It ended 2024 with 129.5 million total customers, a record high for the company.

Not only did T-Mobile reach the highest number of customers in its history, over 60% of new customers opted for the company's more expensive premium plans in the fourth quarter. This pushed average revenue per account to the highest level in seven years among its valuable postpaid customer segment, another reason why the company is producing strong sales growth.

Choosing between the rebounding AT&T and steady performer T-Mobile

With both AT&T and T-Mobile doing well, making a choice between them is a challenge. One factor to consider is stock valuation. Here's a look at their forward price-to-earnings (P/E) ratios. This metric tells you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months.

Data by YCharts.

Historically, T-Mobile's forward P/E multiple has been consistently higher than AT&T's, and remains so at the time of writing. This suggests that AT&T shares are the better value.

That said, AT&T's business is not producing results as robust as T-Mobile's, so the latter warrants a higher stock valuation. For example, AT&T's 2024 revenue of $122.3 billion was a slight drop from 2023's $122.4 billion. Meanwhile, rival T-Mobile saw strong 3.6% sales growth over the same period.

Another area to look at is diluted earnings per share (EPS). One thing contributing to T-Mobile's higher forward P/E ratio is its consistently superior EPS compared to AT&T.

Data by YCharts.

In fact, the chart shows that T-Mobile's diluted EPS has climbed steadily over the past few years. AT&T's EPS has been inconsistent as its business underwent a transition away from its entertainment ambitions. However, that may be changing. AT&T committed to growing EPS from 2025 through 2027.

The bottom line is that investors are choosing between the promise of AT&T's strengthening business, and T-Mobile's already successful operations. Conservative investors may want to opt for T-Mobile, given its established business success.

Investors with a higher risk tolerance may want to consider investing in AT&T. As its business improves over time, I believe this -- combined with its stock's current attractive valuation -- makes AT&T a worthwhile investment over the long term.

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Robert Izquierdo has positions in AT&T and T-Mobile US. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.