Investors can't seem to get behind U.S. telecom giant AT&T (T 1.30%). The stock price is down almost 16% from a decade ago, enough price action for most to declare the stock "dead."
The company was purely focused on telecom, then became a media conglomerate. It recently went back to being a telecom when it spun off its media assets into Warner Bros. Discovery (WBD 0.97%). None of it seems to matter to the market.
So what will it take to get AT&T's stock moving in the right direction? I think I know the answer; I'll walk you through it and explain why AT&T can still be a solid long-term investment.
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AT&T has 168 billion problems
AT&T's massive debt load is the most consistent aspect of the company throughout the past decade and may explain the market's poor sentiment toward the stock. AT&T has a whopping $168 billion in net debt (total debt minus cash on hand), more than the company's entire market cap!
The company spent on two massive acquisitions worth billions of dollars, including $67 billion for satellite television company DirecTV in 2015 and another $85 billion for media company Time Warner in 2018. In 2021, AT&T moved away from its media assets, selling part of DirecTV last year for $16.25 billion, and just recently spinning off Time Warner into a merger with Discovery earlier this year that took some of AT&T's debt into the new company.
Of course, AT&T still holds a lot of the debt from these deals on the balance sheet, with virtually no future returns coming on those resources. The company's net debt has increased 170% over the past decade, and paying that down now falls on the shoulders of AT&T's telecom business. It's hard to blame the market for punishing the stock; this decade has been painful for AT&T's shareholders and wasted a lot of money in hindsight.
Moving beyond spilled milk
Paying down debt seems like the obvious solution for a company with a debt problem, but is AT&T equipped for the task? Management is seemingly aware of how vital healing the balance sheet is. Most investors will tell you that AT&T's dividend is the primary reason they own the stock. While the stock price was down 15.8% over the past decade, the total return on the stock (dividends reinvested) was 74% over the decade. So cutting the dividend as part of the Time Warner spin-off was probably a tough decision.
T Dividend data by YCharts
However, it could be the right decision in the long term. Management cut the dividend from an annual sum of $2.08 per share to $1.11. Management estimates that it will produce roughly $20 billion in annual free cash flow, and the dividend will take up about 40% of that.
In other words, the dividend will cost the company about $8 billion, leaving $12 billion for paying down debt. Paying down $168 billion in net debt won't happen overnight at $12 billion per year, but it's a path forward that gives investors something to follow over the quarters and years ahead.
Get compensated for your patience
So, what is the thesis for investing in AT&T today? Buying stock has two primary benefits resulting from the market's reluctance to embrace it.
First, AT&T remains a stellar dividend stock, even after management dramatically reduced the payout. AT&T's dividend yield is still 5.3% at its current share price, beating bank accounts, government bonds, and most other dividend stocks on Wall Street. So while your dividend income got slashed, it still pays very well to hold shares.
Second, AT&T's become extremely low-valued. Despite its troubles, the stock's traded at a median price-to-earnings (P/E) ratio of 16 over the past decade. Today, the stock commands a forward P/E ratio of just 8, half of its long-term "norm."
T PE Ratio (Forward) data by YCharts
Don't mistake AT&T for a rapidly growing company. Analysts expect earnings per share (EPS) growth to average between 3% and 4% annually over the next three to five years.
If investors warm up to AT&T as its debt load comes down, there is plenty of room for investment returns from a valuation that slowly begins reverting to what it traded at in the past. AT&T probably won't be the most exciting stock in your portfolio, but it could perform well over time.
