Telecom giant AT&T (T 0.23%) spent 2022 gaining a healthy number of wireless and fiber subscribers. The company gained at least 656,000 net postpaid phone subscribers in every quarter of 2022, and its fiber business consistently added at least 280,000 subscribers each quarter as well.
Given the state of the economy, it was inevitable that things would slow down a bit. In the first quarter of 2023, AT&T managed just 424,000 net postpaid phone subscriber adds. The fiber business held up better, but the company booked the fewest number of fiber net adds since late 2021.
This slowdown was part of the reason why AT&T stock tumbled after the company reported those Q1 results last week. With AT&T stock down from its recent high, it's a good time for investors to take advantage and buy the dip.
An expected slowdown
The slowdown in the wireless business was not a surprise. AT&T has been warning that the pandemic-era boom was going to normalize, and that's exactly what's starting to happen. During the fourth quarter earnings call, CEO John Stankey said he expected wireless industry growth to "return to more normalized levels" amid a tough economic environment.
Even with slower subscriber growth, AT&T didn't change its prior outlook for 2023. The company still sees wireless service revenue growth of at least 4%, along with broadband revenue growth of at least 5%. Within broadband, the fiber business will grow much faster, more than offsetting declining revenue from legacy services.
Wireless equipment sales have weakened, and that trend could continue as people become more reluctant to upgrade their smartphones. AT&T recorded $5.1 billion in wireless equipment sales in the first quarter, down nearly 5% year over year.
Along with maintaining its revenue outlook, AT&T also hasn't changed its free cash flow outlook for 2023, despite a Q1 result that raised some eyebrows. AT&T has called for at least $16 billion of free cash flow this year, and it reiterated that forecast in the Q1 earnings call.
In the first quarter, AT&T produced just $1 billion in free cash flow. The company is spending heavily on its wireless and fiber networks, and the timing of these investments, device payments, and incentive compensation contributed to the sluggish free cash generation to start the year. "[W]e feel really good about delivering $16 billion or better," said Stankey during the earnings call.
A margin of safety
AT&T currently has a market capitalization of about $126 billion. Assuming the company hits its free cash flow target for 2023, the stock trades for less than 8 times free cash flow. Beyond 2023, the heavy capital investments AT&T is making in its wireless and fiber networks will cool a bit, opening the door for further free cash flow growth.
Now, AT&T could very well miss that free cash flow estimate if economic conditions deteriorate. But the beaten-down valuation accounts for that possibility and then some. And on top of a single-digit price-to-free cash flow ratio, AT&T stock currently sports a dividend yield of about 6.1% that should be sustainable even if the company comes up short on the free cash flow front this year.
AT&T does have a lot of debt on the balance sheet, and that's a reasonable area of concern for investors, particularly with interest rates rising. The good news is that 95% of the company's debt has a fixed rate that averages just 4.1%, and the company will be able to further reduce its debt over the next few years with any free cash flow left after paying the dividend.
AT&T's core businesses aren't going to perform quite as well in 2023 compared to 2022, but the company is still winning subscribers and producing plenty of cash. With the stock down considerably since the Q1 report, it's a great time to pick up some shares.
