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It's Finally Safe to Buy AT&T Stock

By Rick Munarriz – Nov 26, 2018 at 12:43PM

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An upgrade, an analyst meeting on Thursday, and the dividend boost in the coming weeks may finally bring relief to AT&T investors.

One of the market's biggest losers among telecom giants is showing signs of bottoming out. A bearish analyst is kicking off the new trading week by changing his tune on AT&T (T -2.22%), and a more bullish Wall Street pro is putting out an encouraging note ahead of this week's analyst meeting. AT&T is hosting its financial presentation after Thursday's market close.

Investors can use a break from the drubbing. AT&T stock has buckled below $30 in recent weeks. You have to go back more than six years to find the last time that we've seen that happen. The iconic brand and chunky dividend that has been boosted for 34 consecutive years should've been enough to eat at the risk of owning a piece of Ma Bell, but that hasn't been the case in 2018. The stock begins this week trading 24% lower year to date. Tack on the sizable quarterly distributions and the total return still clocks in at a negative 20%. Owning AT&T has been harder than justifying a landline connection at home, but there are some encouraging signs that the worst may be over for its shareholders. 

AT&T logo in a cloud of blue smoke.

Image source: AT&T.

Making the right call

MoffettNathanson analyst Craig Moffett is upgrading AT&T stock. It's not exactly a ringing endorsement; he's merely going from sell to neutral. His price target at $28 remains unchanged, and it's actually another bad trading day or two below where the shares are now. In short, Moffett's rating is changing only because the stock has taken a beating, but there are worse things than scoring an upgrade based on valuation. There's at least one less bear in the AT&T camp this morning, and if he changes his tune and downgrades the stock after a 15% to 20% pop in price it's something that shareholders would gladly accept as a fair trade. 

On the rosier end of the analytical spectrum, John Hodulik at UBS is talking up Thursday's analyst meeting as a potential catalyst. AT&T will get a chance to sell the market on its future and how all of its big-ticket acquisitions will fit together. Hodulik's sticking to his buy rating, and his $38 price target would find the shares at levels that they haven't seen since February. 

Bears will argue that there are very good reasons for AT&T falling out of favor. The stock took a hit after its rough third quarter, as gains for its wireless unit and freshly acquired Time Warner subsidiary were nearly offset by the gradual fade at its legacy wireline business, continuing defections among DIRECTV subscribers, and sluggishness in Latin America. Reported revenue rose 15% for the third quarter -- following seven consecutive reports of year-over-year declines -- but pro forma results only mustered a 0.2% increase. There also continues to be debate about the $110 billion deal for Time Warner, even though it closed five months ago. 

Bulls can counter that even a 0.2% uptick in pro forma revenue at least delivers AT&T's first period of year-over-year growth in nearly two years. We also can't forget the dividend, as it will likely get another marginal boost either at Thursday's analyst meeting or by mid-December, when the telco giant has announced most of its recent increases. The company is paying $2 a year in dividends -- a whopping 6.8% yield -- and there's room for more. AT&T's guidance calls for adjusted earnings of $3.50 a share and $21 billion in free cash flow this year. The actual catalysts for a turnaround may not be clear, but it will be hard to resist the stock if a higher rate pushes the yield to 7% if shares continue to linger below $30. The future may not be bright, but it's not likely as dark as the past year has been for AT&T investors.

Rick Munarriz owns shares of AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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