Telecom giant AT&T (T 1.30%) hasn't exactly been a stellar performer this year, with shares down 17% year to date. I've owned AT&T in my portfolio for years now, but after the most recent dip, triggered by the Justice Department's challenge to the legality of its merger with Time Warner, it became too cheap to ignore.
Shares have rebounded a bit since the stock's lows on the heels of some analyst upgrades, but are still trading for a remarkably cheap valuation. Here's why I added more shares of AT&T to my portfolio and why the stock could be worth a look for any investor who wants a combination of stable income and growth potential.
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Why did AT&T get so cheap?
At its current share price, AT&T trades for just seven times earnings, an extraordinarily cheap valuation. In fact, this is close to the cheapest AT&T has traded in the past 20 years. And to be fair, there are some good reasons why AT&T has become so cheap.
For one thing, after expanding significantly through its acquisitions of DIRECTV and Time Warner in recent years, AT&T has a lot of debt -- about $180 billion. That's a hefty debt load, and the interest payments alone are going to eat up a lot of the company's profits.
In addition, there's lingering uncertainty related to the Department of Justice's challenge of the legality of the Time Warner merger. Plus, there are shareholder concerns about the benefits of the merger in the first place. In fact, to the surprise of many, shares dropped when it was announced that the merger would be allowed to close.
Finally, the company's recent second-quarter earnings report wasn't exactly stellar. The company's revenue declined by 2% year over year and missed analysts' expectations. Plus, there are lingering concerns that disruptors in the streaming-video space could cause further declines in AT&T's traditional TV business.
Long-term growth drivers
Having said all that, I think there are more opportunities to improve efficiency and drive earnings growth than the market is giving AT&T credit for. The company's mergers create opportunities for synergies and bundled services that competitors simply can't match.
Just to name one hypothetical example, since HBO came with the Time Warner acquisition, AT&T could potentially offer discounted (or even free) HBO Now streaming service to new wireless subscribers. Additionally, the acquisition could reduce its licensing costs in its TV business.
In a nutshell, AT&T's scale is a massive advantage and has gotten even better with the addition of new business lines. In fact, as my colleague Adam Levy recently discussed, the company now has the largest video-subscriber base in the U.S. between all of its different platforms. If AT&T can successfully figure out how to use its newly expanded business to its advantage, there could be significant profit growth in the coming years.
Another ace up AT&T's sleeve is 5G wireless technology, an area where the company should emerge as one of the early leaders.
With AT&T's 6% yield, it won't take much growth to deliver great long-term returns
The bottom line is that I believe AT&T has far more opportunities to grow than the market is giving it credit for. And with a dividend yield in excess of 6%, it doesn't really need to grow especially fast in order to produce some pretty attractive total returns.
