Is AT&T Stock a Buy Now?

As the old saying doesn't quite go, "Ma Bell may have invented the telephone, but she's struggling to keep up with the times."

That conclusion makes perfect sense when you look at AT&T's (T 1.45%) recent financial data. With a bargain-basement forward P/E ratio and negative earnings per share over the trailing twelve months, there seems to be something seriously wrong with this once-great telecom company.

Are we looking at a turnaround story in progress, well worth some of your hard-earned investable dollars, or should you swim away from AT&T's sinking boat?

Data source: Finviz.com on March 30, 2023.

AT&T keeps a stiff upper lip

Recent analyst comments have only added to the gloom around AT&T's stock. Analyst firm MoffettNathanson recently downgraded not only T-Mobile (TMUS -0.10%) but also AT&T and Verizon Communications (VZ 1.43%), citing a "growing mismatch" between industry growth rates and internal expectations across the three major telecoms. Subscriber growth is not what it used to be, and the telecom giants are plastering their porcine patronage progress in powder and pencil liner.

AT&T COO Jeff McElfresh continues to put on a suitably brave face in earnings calls and investor conferences. In a technology and telecom symposium last month, for example, the conference host raised the specter of cable companies muscling in on the wireless communications market with low-priced bundles. McElfresh shrugged off that potential threat with this justification:

"The share take or the share change isn't a material number for us," he said. "Cable at some point is going to have to tackle the cost of continuing to service a growing wireless customer base and the handset evolution and the cycling of that. So I think they've got potentially some margin questions coming."

In other words, cable giants are welcome to explore the wireless market because they'll eventually find that the profit margins aren't great. You know, as AT&T found out the hard way many years ago.

T Gross Profit Margin data by YCharts

Meanwhile, AT&T's once-generous dividend yield of 5.8% is starting to look like a red flag. As we've seen time and again, excessive dividend yields can be a sign of trouble brewing under the surface. In this case, the yield is inflated by a low stock price and I'm not impressed by the payout policy's support from free cash flows. AT&T cut its quarterly dividend checks in half last year and still ended up spending 70% of its cash profits on dividend checks. Without the cut, AT&T would be financing the quarterly dividend checks from its dwindling cash reserves by now.

There are better investments aplenty

All of this paints a pretty bleak picture for AT&T investors. But fear not -- you can walk right past this telecom dinosaur and find plenty of superior ideas in this rapidly changing market.

As MoffetNathanson noted earlier, the telecom industry isn't exactly great shakes right now but T-Mobile still strikes me as a better option in that hard-luck sector. T-Mobile's growth prospects stand head and shoulders above AT&T and Verizon. And while Verizon might not be quite as exciting as T-Mobile, it's still a solid choice for investors who don't mind a stodgy but reliable telecom leader. Verizon's profit margins are hard to beat. AT&T nailed the "stodgy" part but missed the call for "reliable" results.

So you have options, even within this distressed industry. And last year's massive price drops created plenty of downright delectable investment opportunities in sectors with much better growth prospects.

The bottom line is that AT&T might not be the best investment choice in today's market, but there are lots of strong investment alternatives out there for savvy investors. So if you were thinking about buying AT&T stock, you might want to think twice and consider some other options instead.

As they actually do say, "when one door closes, another one opens." And in today's low-priced market, there are plenty of doors waiting to be opened when the downbeat economy turns up the volume again. Unfortunately, I don't think AT&T will be among the biggest winners when that day comes.