I don't know about you, but I like to invest in companies that provide a critical service to its customers. Telecom giant AT&T (T 0.86%), one-third of the wireless triopoly in the United States, does just that. Smartphones have become essential, and it would be unthinkable for many to not have internet access on the go.
The stock market doesn't particularly like AT&T stock. Shares have been in a downtrend since right before the pandemic, and they're down approximately one-third from their multi-year high. Some pessimism in the past has certainly been warranted: AT&T went on a spending spree acquiring media assets, but it never quite figured out how to be a media company.
Thankfully, that era at AT&T is now over. With the spin-off of WarnerMedia, which is now part of Warner Bros. Discovery, AT&T is back to basics. The company is investing in its wireless network and its fiber internet initiative, both of which should drive steady growth for years to come. The market hasn't yet warmed up to AT&T, giving long-term investors a golden opportunity to pick up shares at a discounted price.
A bona fide bargain
AT&T throws off a ton of cash. It also consumes a lot of cash – building out wireless and fiber networks are expensive endeavors. Last year, there was $14.1 billion in free cash flow left over after accounting for all AT&T's capital investments. This year, the company expects that number to grow to at least $16 billion.
This cash flow goes mostly toward two things: Paying the dividend and reducing debt on the balance sheet. AT&T cut its dividend in the wake of its spin-off of WarnerMedia, bringing the quarterly payout down to sustainable levels. The latest dividend payment of $0.2775 per share works out to a dividend yield of about 5.6%, and it will consume roughly $8.3 billion over the next year. That leaves nearly $8 billion left over, if AT&T's guidance bears out.
That extra $8 billion will come in handy as AT&T works to reduce its indebtedness. The company paid dearly for its media acquisitions, and some of the debt from those deals is still weighing AT&T down. Total debt stood at $136 billion at the end of 2022, and interest payments on that debt last year were roughly $6.1 billion.
While this debt is a legitimate negative for investors, AT&T's rock-bottom valuation can't be ignored. With a market capitalization of $143 billion, shares of AT&T trade for just 9 times free cash flow guidance. Even with the stock up about 38% from its 52-week low, AT&T is still astonishingly cheap. And free cash flow should rise further in the coming years as AT&T completes this round of investments and pulls back a bit on capital spending.
The long-term story
AT&T's growth story revolves around wireless and fiber. In both businesses, the company is doing well despite a difficult economic environment.
In wireless, AT&T consistently added at least 650,000 postpaid phone subscribers on a net basis in each quarter of 2022. These subscriber additions drove the company's wireless service revenue up 5.1% for the full year, and AT&T expects at least 4% growth in 2023.
In fiber, AT&T is growing its subscriber base quickly enough to more than offset the ongoing decline in the legacy portion of the wireline business. Fiber revenue has now surpassed non-fiber revenue, and the number of fiber connections has surpassed the number of non-fiber connections. Fiber commands higher monthly fees than non-fiber services, and the company still has plenty of room to expand its network and win over additional customers already passed by the fiber network.
While AT&T will certainly hit bumps in the road, particularly with a global recession a real possibility this year or next, the company is in a great position to steadily grow both its wireless and fiber businesses over time. For investors looking for a solid value stock with a nice dividend to boot, AT&T is a great option.
