AT&T Inc. (NYSE: T) may seem like a boring company. Its stock has done little in recent years, and the company’s bloated balance sheet carries $175 billion or so in long-term debt. What AT&T does have going for it is that it has a long history of raising its dividend. That yield is now above 7%.

The question to ask looking ahead, particularly in a muted and slowing recovery from the pandemic, is just how much of a dividend hike can be expected. A more pointed question to consider is whether AT&T should stop hiking its dividend and focus on working its acquisition-driven debt down to more reasonable levels.

There is also a burning question about why AT&T has such a higher dividend yield than the current 4.2% yield paid out by Verizon Communications Inc. (NYSE: VZ). AT&T’s market cap is now $205 billion, since its stock has been weak, and Verizon’s market cap is $248 billion, as its stock has remained strong. While $124 billion in long-term debt is not low, it’s better than AT&T’s debt load.

Verizon’s dividend announcement back on September 3 was just a 2% hike, and that marked its 14th year of dividend hikes.

AT&T has been much more aggressive over the past decade in acquisitions than Verizon, and its balance sheet is more bloated. It acquired Time Warner just in time for the pandemic-induced instant recession, and DirecTV has been feeling subscriber pressure as the rise of cord-cutters has become much more prevalent than five years ago. Verizon’s acquisitions of AOL and Yahoo have been far less costly than AT&T’s acquisitions.

AT&T recently had an update from new CEO John Stankey at a Goldman Sachs conference noting that the company is expected to have a payout rate in the 60% range. The company is also targeting continued net debt reduction as an effort to bolster the balance sheet and to make its borrowing terms better. AT&T remains confident that it can generate strong cash flow that will support its dividend and debt reduction despite limited visibility about the long-term economic impact and duration of the coronavirus.

While around 60% is the same that had been discussed multiple times during this recovery, the most recent dividend hike was by only 2% to $2.08 per share on an annualized basis. The consensus estimate is $3.18 in earnings per share in 2020 and $3.22 in 2021, so the company’s ability to target a dividend hike at a floor of 60% would generate $1.91 in annualized dividends. Targeting a 1% dividend payout hike to $2.10 would be a payout ratio of roughly 66% of trailing earnings.

The credit ratings agencies tend to see Verizon as having less leverage than AT&T. Standard & Poor’s rates AT&T as BBB and Moody’s rates it as Baa2, both of which are still investment grade and come with stable outlooks. Verizon carries a Baa1 rating at Moody’s and a BBB+ rating at S&P, and their outlooks were both listed as positive.

Verizon’s stock comes with a much more modest (but still high) dividend yield. AT&T shares were last seen down about 26% so far in 2020. Verizon is still down year to date as well, but only by about 3%.

AT&T generally hikes its dividend in a December announcement, and any hike this time around should be modest. AT&T’s ongoing capital allocation generally keeps calling for continued modest annual increases in its dividend.

Wall Street is not very active in its own analyst calls on AT&T. Scotiabank cut its rating to Underperform from Sector Perform with an unenthusiastic $30 target price at the end of August. At the start of that month, Deutsche Bank maintained a Buy rating but trimmed its target price to $37 from $38.

At $28.90 per share, AT&T has a 52-week range of $26.08 to $39.70, and the Refinitiv consensus analyst target price is $32.40. Verizon’s current $59.85 share price is within a 52-week range of $48.84 to $62.22, and the consensus target price is $61.17.

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