Investors were justified in shying away from AT&T (T -1.00%) stock over the last few years. Its share price sank from nearly $30 toward the end of 2019 to a 52-week low of $16.62 last December as the company dismantled the entertainment empire it spent billions to acquire, and cut its high-yield dividend in the process.
But the last act in AT&T's Hollywood story arrived on April 8, when it completed the merger of its WarnerMedia entertainment division with cable TV company Discovery, forming Warner Bros. Discovery. The milestone concluded the divestiture of AT&T's entertainment holdings.
Is the remaining AT&T a compelling investment? Looking at its telecom business after John Stankey became CEO in 2020 can help to assess if the post-entertainment AT&T is a worthwhile long-term investment.
AT&T's customer success
By spinning off its entertainment division, AT&T can focus resources on its telecom operations. This bodes well for AT&T's future since its telecom business has excelled at capturing customers under Stankey, a must in the highly competitive U.S. market.
For instance, AT&T's 2021 net adds among postpaid phone subscribers, the telecom industry's most valuable customer segment, totaled 3.2 million, more than the previous 10 years combined. The company carried last year's success into the first quarter of 2022 with 691,000 postpaid phone net adds, the highest Q1 total in over a decade.
AT&T is also gaining customers in its consumer broadband division thanks to the company's fiber optic internet service. Fiber offers a faster, more reliable internet connection than AT&T's old copper-based product. As a result, the company ended Q1 with 6.3 million broadband connections, up from 5.2 million last year.
This customer growth helped AT&T increase 2021 revenue 4.3% year over year on a pro forma basis, which strips out the company's divested businesses including WarnerMedia, reaching $118.2 billion compared to $113.3 billion in 2020. Revenue growth extended into 2022 as pro forma Q1 income rose 2.5% year over year to $29.7 billion.
AT&T's sales gains are expected to continue throughout 2022, and the company anticipates year-over-year revenue growth in 2023 as well. AT&T sees customer adoption of 5G networks and fiber driving this growth with broadband income forecast to expand at least 6% this year.
Other factors to consider
Rising equipment sales are also contributing to AT&T's revenue growth. Customers who want to access 5G networks must purchase 5G-compatible mobile devices, and they are doing exactly that.
Equipment sales for AT&T's mobility segment have risen for two consecutive years. 2022 may add a third year of growth as Q1 equipment revenue reached $5.4 billion, a 7.3% increase from 2021.
Despite the revenue growth, AT&T's financial health remains a concern because the company ended 2021 with over $170 billion in debt. The WarnerMedia spinoff helped improve this situation. Warner Bros. Discovery took on some of AT&T's massive debt, and also paid the telecom $40.4 billion in cash.
Moreover, AT&T is working on debt reduction by eliminating $6 billion in run-rate costs, and reaching a net debt-to-EBITDA ratio in the 2.5 range by the end of 2023. This ratio stood at 3.42 in Q1.
Today's AT&T is well positioned to reduce debt while paying dividends and investing in its business thanks to the company's ability to generate billions in free cash flow annually. AT&T forecasts this year's free cash flow to come in around $16 billion on a pro forma basis, rising to the $20 billion range in 2023 as spending on 5G and fiber network expansion slows down.
To buy or not to buy AT&T shares
The deal with Discovery marks a turning point for AT&T. Its dedicated attention toward telecommunications comes at the perfect time since its 5G and fiber businesses are in a growth phase.
The company's success with customer acquisition and retention is key to continuing its track record of revenue growth under Stankey. Capturing customers is critical because the U.S. telecom market is at a saturation point. With 97% of U.S. adults owning a mobile phone, AT&T must take customers from competitors to grow.
Under John Stankey, AT&T is successfully doing this, edging out rival Verizon Communications for postpaid subscribers. The company is also experiencing customer churn at near historic lows, validating its ability to retain customers.
While AT&T's newly reduced dividend is disappointing for investors, the yield remains over 5% at the time of this writing. This is well above the S&P 500's 1.4% average dividend yield in Q1.
The company's focus on continued growth of its telecom business, while improving its financial health, puts AT&T in a much better position to succeed after its Discovery deal, making AT&T a good long-term investment.