Better Bear Market Stock: AT&T vs. Apple

AT&T (T -1.41%) and Apple (AAPL -0.55%) both are considered stable blue-chip tech stocks to hold during economic downturns. AT&T, which abandoned its media ambitions by spinning off DirecTV and WarnerMedia over the past two and a half years, is now a stable and streamlined play on wireless and cable networks. Apple generates constant growth through its sales of iPhones, iPads, Macs, accessories and services.

Both of these stocks outperformed the market over the past 12 months. AT&T’s stock rose 5% and Apple’s stock fell just 2%, while the S&P 500 fell 9%. But will they continue to generate better returns than the S&P 500 if the bear market drags on?

Why the “new” AT&T is a safe buy in the bear market

Before it spawned DirecTV and WarnerMedia, AT&T’s business was a confusing mix of telecom, pay-TV and media businesses. Its telecommunications business stagnated as it tried to challenge Netflix and other media companies in the crowded streaming market, but these loss-making strategies crushed its margins and caused its debt levels to rise.

That’s why investors cheered when it abandoned those expensive plans and eventually focused on upgrading its fiber and 5G networks. By 2022, this “new” AT&T gained 2.9 million postpaid phone subscribers, compared to a gain of just 201,000 postpaid phone subscribers at its larger rival Verizon. The expansion of its consumer-facing fiber segment has also offset slower growth in its wireline business, which is more exposed to macroeconomic headwinds.

AT&T expects its free cash flow (FCF) to grow from $14.1 billion in 2022, which easily covered its $9.9 billion in dividends, to over $16 billion in 2023. Analysts expect its revenue to grow 2 % this year as its adjusted EPS falls 5% . But excluding the impact of higher pension costs and tax rates this year, its adjusted EPS will grow by about 1%.

Based on these expectations, AT&T trades at just eight times forward earnings and pays a forward dividend of 6.1%. The low valuation and high yield should make it an attractive alternative to fixed-income investments such as CDs, Treasury bills and bonds.

Why Apple is still an evergreen investment

Apple still generates over half of its revenue from the iPhone, which undergoes major upgrade cycles every few years. Its last major upgrade cycle occurred in fiscal 2021 as more consumers bought the iPhone 12 (its first family of 5G devices), but growth cooled in fiscal 2022 as it pared those upgrades and encountered more COVID-19 lockdowns in China.

Analysts expect Apple’s revenue and earnings to fall 1% and 3%, respectively, this year as iPhone 14 sales remain soft and inflationary headwinds curb the market’s appetite for new devices. Currency headwinds can exacerbate this pain.

But at the end of the first quarter of fiscal 2023 (which ended December 31), Apple was still sitting on $165 billion in cash and marketable securities — giving it plenty of room to make new investments, buy back more shares and raise its yield. It generated $97.5 billion in FCF over the past 12 months, easily covering its $14.9 billion in dividends over the same period and giving it plenty of room to raise its paltry 0.6% forward yield .

Apple also reached 935 million paid subscribers across all its services in the first quarter, giving it a solid foundation to launch new products. Apple is widely expected to launch a new mixed reality headset this year, but the potential launch of that device hasn’t even factored into Wall Street expectations yet. Apple’s stock isn’t cheap at 26 times forward earnings, but I think it’s still an evergreen investment that should continue to grow after the near-term headwinds dissipate.

The better buy in the bear market: AT&T

AT&T and Apple should both remain solid investments this year, but I believe the former is still a better buy in the bear market than the latter for three simple reasons. First, AT&T pays a more generous dividend and trades at a lower valuation. Its forward rate is also much higher than the 10-year Treasury’s current yield of 3.5%, so it should remain a decent alternative to high-yield savings accounts and fixed-income investments as interest rates continue to rise.

Second, AT&T operates a simpler business model that is less prone to cyclical headwinds. Nor does it generate more than half of its revenue from a single product.

Finally, AT&T doesn’t do as much business in China as Apple, which relied on the geopolitically sensitive region for a fifth of its revenue last quarter. All of these strengths could make it much more appealing than Apple in a bear market — which generally prioritizes short-term stability over long-term growth.