Over the past decade, few stocks have been as much of a disappointment as AT&T (T 1.61%). As you can see from the chart below, the stock price has fallen 41% during that time, even though it's managed to deliver a positive total return with the help of dividend payouts. Still, it has significantly trailed the S&P 500.
AT&T has struggled on multiple fronts in recent years. It's made value-destroying acquisitions, including DirecTV and Time Warner, which has since become part of Warner Bros. Discovery. With both moves, the company failed to anticipate shifts in consumer demand toward streaming. It's also lost market share and struggled to grow revenue during that period.
However, AT&T has now committed to refocusing on its core business following the spin-off of WarnerMedia -- and it is investing significantly in 5G infrastructure. Despite its struggles, the company remains a major player in the U.S. economy. According to the Fortune 100 list, it's the 13th-biggest company by revenue in the U.S., and it remains attractive to income investors with its enormous dividend yield of 7.2%.
Based on conventional metrics, the stock looks cheap, trading at a price-to-earnings ratio of just 6. Is AT&T a diamond in the rough right now or a value trap? Let's take a closer look.
Image source: AT&T.
The competitive landscape
While AT&T might offer a juicy dividend yield and trade at a low valuation, those numbers are largely explained by the fact that the company competes in a little-to-no-growth industry, where price competition between itself and Verizon Communications and T-Mobile, the other two major U.S. carriers, is intense.
The company is focused on managing costs while expanding its wireless and fiber network and prioritizing durable customer relationships.
CEO John Stankey recently reiterated the company's free cash flow guidance of $16 billion or better this year, and called for it to grow adjusted earnings before interest depreciation and amortization (EBITDA) by at least 3% in 2023. However, even its free cash flow target is below its initial guidance last year of $20 billion for 2023.
The company continues to expand its 5G infrastructure with a target of making the mid-band spectrum for 5G available to 200 million by the end of the year. AT&T is also growing its wireless monthly billed subscriber base, adding at least 400,000 postpaid phone net adds for at least 11 straight quarters.
However, the company is seeing declines in its legacy wireline business, which has countered the gains in the mobility business.
AT&T is also facing pressure from a massive debt burden following the disastrous acquisitions of DirecTV and Time Warner. The company finished the first quarter with $136 billion in debt, and it has more than $73 billion in goodwill and other intangible assets, which makes it vulnerable to further asset impairments.
As a result of its debt, the company is paying roughly $7 billion a year in interest expense, putting a significant dent into its profits.
Is AT&T stock a buy?
AT&T deserves credit for committing to the core telecom business, but the bull case for the company still seems thin. The company lacks a competitive advantage in the telecom industry, and its debt burden is a drag on its financial performance.
Management's track record of meeting or exceeding its guidance is also wanting, and the company still needs to earn investor credibility in order to rebound. Finally, the lack of growth opportunities in the mature telecom industry also limits the stock's upside potential.
Barring a black swan event, AT&T seems likely to struggle to grow profits, and it seemed more likely than not to remain a value trap, as it's been for the last decade.
