There is no segment of the stock market that performed worse this year than the communications sector. Year to date, fixed-line, wireless telecom, broadband, and cable operators have collectively cratered over 38% in 2022, according to data from Fidelity, while also lagging behind everyone over the past three-, five-, and 10-year time periods.
Yet one telecom has bucked the trend: AT&T (T 1.10%). There are a handful of peers that are doing better -- T-Mobile (NASDAQ: TMUS) is up 24% this year, for instance. However, AT&T has been on a bit of a rollercoaster ride after the spinoff and merger of its entertainment division into Warner Bros. Discovery in April. Ultimately, AT&T's stock has recovered from most of its losses throughout 2022, dipping only 0.5% year to date.
In fact, the stock now sits 30% above the low point it hit in mid-October. With that in mind, here's a closer look at what we might expect from the telecommunications stock heading into 2023 and beyond.
Image source: Getty Images.
AT&T is doing at least one thing right
AT&T is no longer the company it was a year ago. Having shed multiple noncore assets beyond just the entertainment unit, which resulted in a massive cut to its dividend, the telecom is now a much leaner, more narrowly focused operation. Its dividend is also much more sustainable now, too.
Revenue is on the rise once again, increasing 3.2% in the third quarter to $29.1 billion, while the company continued to add hundreds of thousands of new customers. So far this year, AT&T has added over 2.2 million new customers to its postpaid phone business. In comparison, Verizon has lost customers in this segment this year.
Moreover, this has come about despite price increases and the company not being nearly as promotional as its competition. COO Jeff McElfresh told analysts the telecom has not "been the most aggressive in the market for quite some time," even with the start of the holiday shopping season, when AT&T refrained from being "aggressive" with deals on Black Friday.
The carrier is going to need the revenue streams the new customers bring because it still has a massive debt load it needs to reduce.
A heavy burden
AT&T's acquisition of Time Warner saddled the telecom with billions in debt, and at the end of the third quarter, it was still nursing almost $124 billion in long-term debt, which carried $1.4 billion in interest expense.
The $43 billion it raised from the creation of Warner Bros. Discovery will go a long way toward reducing those liabilities, but there are also other claims on the money, such as needing to invest in the rollout out of its 5G networks.
It has been about a decade since telecom providers meaningfully improved wireless download speeds, so the ongoing upgrade of wireless infrastructure to support 5G speeds helps AT&T as it drives further demand in the smartphone market.
The goal is to generate improved profitability to support its still-generous dividend that currently yields 5.8% annually.
Image source: Getty Images.
Still rewarding shareholders
Investors were initially alarmed that AT&T was slashing its payout after the spinoff, which accounted for the dive the telecom's stock took in the aftermath. And even though shareholders received Warner Bros. Discovery stock as part of the divestiture, the owner of the HBO Max streaming service has been almost in free fall since its debut on the market.
AT&T had said before the spinoff occurred that it wants the dividend to be in the range of 40% to 43% of free cash flow (FCF), but it still has some distance to go to achieve it.
The telecom reiterated its goal of delivering $14 billion in FCF this year, down $2 billion from original projections, but it maintains that's more than enough to cover the $8 billion in dividend commitments for the year. That's 57% of FCF, but AT&T looks forward to steady improvements in the years to come.
A good business at a cheap price
All of this leaves AT&T stock trading at a substantial discount. It goes for 7 times trailing earnings and next year's estimates, while also valued at a steeply discounted 3 times the FCF it produces.
Considering AT&T is able to produce such prodigious amounts of excess cash despite the spinoff -- or perhaps because of it -- the valuation is incredibly attractive. So regardless of the big jump the stock has made off its lows, there is still plenty of runway ahead that investors can comfortably jump on board.
