AT&T (T -0.59%) posted its second-quarter report on July 26. Its revenue rose 1% year over year to $29.9 billion, which missed analysts' estimates by $30 million. Its adjusted earnings per share (EPS) fell 3% to $0.63 but beat the consensus forecast by three cents.
AT&T's stock barely budged after that mixed report, and it remains down nearly 20% this year. It certainly looks cheap at six times forward earnings and pays a hefty forward dividend yield of 7.5% -- but is it a worthwhile long-term investment?
Image source: AT&T.
First, the bad news...
AT&T's wireless segment added nearly 2.9 million postpaid phone subscribers in 2022, then added 424,000 postpaid phone subscribers in the first quarter of 2023. That marked its 12th consecutive quarter of at least 400,000 net adds. Unfortunately, that streak ended with its addition of just 326,000 postpaid phone subscribers in Q2 -- which broadly missed analysts' expectations for more than 400,000 net adds.
But at a Bank of America conference in late June, CFO Pascal Desroches had already tempered the market's expectations by predicting AT&T would only gain about 300,000 postpaid phone subscribers in Q2. Nevertheless, AT&T is still growing faster than Verizon (NYSE: VZ), which only added 201,000 wireless postpaid phone subscribers in 2022, lost 127,000 subscribers in Q1 2023, and added a mere 8,000 subscribers in Q2.
However, investors should note that AT&T and Verizon both still face a lot of questions regarding the safety and environmental effect of their lead-sheathed copper cables. AT&T didn't answer any of those questions clearly during its latest conference call, but some analysts believe it could still spend billions of dollars to replace those legacy cables in the near future. Those pressing issues could compress AT&T's and Verizon's valuations until they're resolved.
Lastly, AT&T's business wireline revenues fell roughly 6% year over year to $5.3 billion as the market's demand for legacy voice and data services dried up. That business should remain weak for the foreseeable future as companies streamline their communication options with cloud-based services like Zoom.
Now, the good news...
AT&T's growth in new wireless subscribers is cooling off, but its total mobility service revenues still rose 5% year over year to $20.3 billion in Q2. That growth was driven by its higher average revenues per user (from higher-margin plans and more international roaming charges), which offset its slowing growth in postpaid subscribers.
The mobility segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin also expanded 250 basis points year over year to 43%, which represented the segment's highest ever Q2 EBITDA margin. It's still competing aggressively against Verizon and T-Mobile through promotions, discounts, and subsidies, but those strategies don't seem to be crushing its margins.
AT&T's Fiber business also continues to grow and offset its non-fiber broadband declines. It added 251,000 Fiber subscribers in Q2, marking its 14th consecutive quarter of at least 200,000 net adds. As a result, its total consumer wireline revenues grew 2% year over year to $3.3 billion and partly offset its declining business wireline revenues.
But most importantly, AT&T generated $4.2 billion in free cash flow (FCF) during Q2 and reiterated its goal of generating $16 billion in FCF for the full year. That confident outlook allayed some concerns that it would miss that closely watched target after higher 5G and fiber expenses reduced its quarterly FCF to just $1 billion in Q1.
Lastly, AT&T predicted that as it expanded its three-year cost-cutting plans by $2 billion, it would reduce its net debt to EBITDA ratio to 3 by the end of 2023. That target keeps it on track to reducing that ratio to 2.5 by the end of 2025.
Is AT&T's stock worth buying right now?
AT&T's growth rates could remain sluggish this year as it expands its higher-growth businesses with expensive infrastructure expansion strategies. Analysts still expect its revenue and earnings to decline 9% and 15%, respectively, for the full year.
However, AT&T's growth rates could stabilize in 2024 and beyond. If you expect AT&T's strengths to eventually offset its weaknesses, it could be a great time to buy this out-of-favor stock, collect its big dividends, and wait patiently for a long-term turnaround. Until that happens, its low valuation and high yield should limit its downside potential.
