Why Shares of AT&T Popped in January

What happened

Shares of AT&T (T -0.92%) popped 10.6% in January, according to data from S&P Global Market Intelligence. The telecommunications company reported it had strong subscriber growth across its business lines in the fourth quarter, leading investors to bid up the stock. After the company spun off its entertainment division last year, investors are appreciating a more streamlined strategy to grow phone and broadband subscribers.

So what

On Jan. 25, AT&T released its earnings results for the fourth quarter of 2022. The company outpaced analyst estimates for its mobile phone business, growing subscribers by 2.9 million in 2022 to 69.6 million. Its smaller fiber broadband business is showing strong growth as well, adding 1.2 million customers in 2022 and hitting 7.2 million total customers by year-end.

Steadily growing subscribers across its huge fixed cost base allows AT&T to generate consistent cash flows. In 2022, the company generated $14.1 billion in free cash flow, which management expects to grow to $16 billion in 2023. That conservatively covers its annual dividend, which is currently yielding 5.6%.

Investors fell out of love with AT&T after its acquisition of Time Warner in 2018. While the acquisition brought in quality assets like HBO, it saddled AT&T with a ton of debt. Management also failed to adapt quickly enough to the internet streaming transition, losing out to competitors like Netflix, Walt Disney, and Amazon. Luckily for AT&T investors, the company spun out Time Warner in early 2022 to form Warner Bros. Discovery. This offloaded some of AT&T's debt and now allows it to focus on its core competency: telecommunication and internet services. 

Now what

If you are looking for rapid growth, AT&T is not the stock for you. Its mobile phone business is already highly penetrated across its core markets, and the fiber business will only add small incremental revenue to its top line. Sure, it can grow its total subscribers by a small amount each year, but it is unlikely that perpetual double-digit sales growth is in the cards. However, with a market cap of $141 billion, AT&T trades at a cheap forward price-to-free-cash-flow ratio of 8.8, meaning that it doesn't need to grow all that much in order to provide solid long-term returns.

With a dividend currently yielding above 5%, AT&T looks like a great buy for income-focused investors after this recent earnings report.