Is AT&T Stock a Buy Now?

Well-chosen dividend stocks can provide ballast to your investment portfolio during volatile economic environments. Dividends can also supply you with a reliable income stream while you wait for stock prices to recover from bear market downturns.

AT&T (T 1.61%) has long been a favorite among dividend-focused investors. It's easy to see why. The telecom titan's shares currently yield a hefty 7%, making it one of the highest-yielding stocks in the S&P 500 broad market index.

Let's take a closer look at AT&T's business fundamentals to see if its stock is an attractive long-term investment at today's prices.

The bull case for AT&T stock

Millions of people have come to view wireless and broadband internet services as indispensable utilities. Telecommunication companies thus tend to have relatively steady subscriber and revenue bases, which allows them to generate bountiful, consistent free cash flow. This is largely true for AT&T, which is beloved by investors for its steady cash flow production and high cash payouts.

However, AT&T strayed from its core telecom operations when it acquired Time Warner in 2018. The $85 billion deal saddled AT&T with tens of billions of dollars of additional debt. Worse still, much of the growth and cost-savings management promised failed to materialize.

Under new CEO John Stankey, AT&T has refocused its efforts on its best businesses. In April, AT&T divested its Warner Media assets by merging them with Discovery. With its greater scale, the newly combined company, Warner Bros. Discovery (WBD 0.49%), now has the potential to become a powerful force within the media industry.

The Warner divestiture and other sales of noncore assets are making it easier for AT&T to invest in its 5G wireless network and broadband operations. The early results are promising. AT&T added 813,000 postpaid phone subscribers, who pay monthly bills and are generally the most profitable customers for wireless carriers, in the second quarter. This was the company's best second-quarter performance in more than a decade, and it brought its total postpaid phone subscriber base to 68.3 million at the end of June.

AT&T also added 316,000 high-speed fiber internet customers. That contributed to a 22% year-over-year jump in total fiber subscribers, to 6.6 million. 

Risks for investors to consider

AT&T ended the second quarter with a whopping $131.9 billion in net debt. This massive debt load could become particularly burdensome if interest rates continue to rise. To lessen this risk, AT&T is planning to use much of its excess free cash flow after dividend payments to pay down its debt. With a projected $14 billion in free cash flow in 2022 and expected dividend payments of roughly $8 billion, AT&T should have about $6 billion to put toward debt reduction. Cost-saving initiatives and additional asset sales could help to further reduce the telecom giant's debt load.

Intensifying competition represents a more worrisome risk for investors. T-Mobile's (TMUS 0.18%) acquisition of Sprint in 2020 helped it build a highly regarded 5G network, eliminating AT&T's prior network quality advantages in the process. AT&T is investing heavily in spectrum and other assets to strengthen its own 5G network, but the build-out is likely to be costly.

Additionally, if AT&T continues to rely on heavy discounts and promotions to compete with T-Mobile for postpaid phone subscribers, it could further pressure its profit margins.

AT&T's stock is inexpensive

Yet many of these risks are likely already reflected in AT&T's depressed stock price. With its shares trading near 52-week lows, AT&T's shares can currently be had for only about 7 times trailing earnings. Its price-to-earnings (P/E) ratio falls to an even more attractive 6 based on Wall Street's earnings estimates for 2022.

That's quite a discount to the P/E ratios of the Dow Jones Industrial Average and the S&P 500 Index, which both currently check in at about 17.8. This low stock valuation, combined with AT&T's high dividend yield, should help to limit the potential downside risks for investors.

Moreover, even if AT&T can't deliver much growth in sales and profits -- management expects revenue to grow by only low single-digit percentages this year -- share owners could still collect sizable returns of 7% from dividends alone. If AT&T can eventually generate just 3% annual gains in earnings per share, total returns to shareholders could approach 10%.

So is AT&T's stock a buy?

With lucrative opportunities in 5G wireless services and high-speed fiber internet, AT&T's earnings growth could surprise to the upside. A more streamlined operational structure and disciplined financial management should further help the telecom titan deliver gains to investors.

Competitive threats should not be overlooked but are likely already priced into AT&T's shares. Thus, investors seeking a high-yield, yet relatively low-risk, dividend stock would be wise to consider AT&T.