A quick look at AT&T's (T -0.44%) stock chart is enough to scare away most investors. You'd have to go back to the early 1990s to find the stock trading at a similar level as today.
There are legitimate reasons to avoid AT&T stock, especially the company's excessive debt load. But there are also plenty of reasons to buy the stock. The past is not the future, and after being beaten down for years, AT&T stock is capable of providing market-beating returns.
Solid wireless growth
The pace at which AT&T is gaining wireless subscribers has slowed, but the company is still adding to its total each quarter. The company added 326,000 postpaid phone subscribers in the second quarter, along with 123,000 prepaid phone subscribers. Over the past year, AT&T has gained 2 million postpaid phone subscribers, and average revenue per user has edged up slightly.
Total mobility revenue rose 4.9% year over year in the second quarter. While growth may slow as new subscribers become a bit harder to come by, AT&T has managed to keep churn exceptionally low. Postpaid phone churn was just 0.79% in the second quarter, up only slightly from last year. Rival Verizon has been losing subscribers, which makes AT&T's performance stand out even more.
A growing fiber internet business
On top of the wireless business, AT&T is building out a fiber internet business that's now big enough to offset declines in legacy services. Consumer wireline revenue increased slightly in the second quarter, driven by 28% growth in fiber revenue. AT&T's fiber internet costs more than its legacy offerings, so the 251,000 new fiber customers it added during the second quarter more than made up for subscriber losses elsewhere in terms of revenue.
AT&T now has 7.7 million fiber subscribers generating $1.5 billion in quarterly revenue. The company will continue to expand its fiber network to existing service areas while tapping into new areas via GigaPower, its joint venture with BlackRock. AT&T expects to pass 30 million consumer and business locations with its own fiber network by the end of 2025, with GigaPower providing additional opportunities.
Plenty of free cash flow
Despite the slowdown in wireless subscriber growth, AT&T remains on track to generate at least $16 billion of free cash flow this year. AT&T has a lot of debt on its balance sheet, partly the legacy of its failed foray into the media business. That free cash flow will come in handy as it works to pay that debt down.
AT&T's net debt stood at $132 billion at the end of the second quarter. While the company generated $15.2 billion in free cash flow over the past year, dividend payments, one-time items, and currency exchange rate impacts ate up essentially all that free cash flow. Over the next two years, AT&T plans to pour much of its free cash flow after dividends into reducing its debt. The company expects a $4 billion debt reduction in the second half of this year alone. Lower debt will make AT&T's balance sheet less fragile.
A sky-high dividend yield
AT&T generates enough free cash flow to sustain its dividend, although investors shouldn't expect anything other than a token dividend increase anytime soon. Based on the latest quarterly dividend of $0.2775, AT&T stock yields just about 8%. Over the past twelve months, AT&T used about 61% of its free cash flow for dividend payments.
The dividend gets safer as AT&T pays down its debt, so it makes sense for the company to plow as much free cash flow as possible into debt reduction. Even with a dividend payment that will likely be stagnant for the foreseeable future, an 8% yield is hard to pass up.
A rock-bottom valuation
Pessimism surrounding AT&T stock is running high right now, even after a solid second-quarter report. The company is valued at just $100 billion, putting the price-to-free-cash-flow ratio at about 6.25. In other words, AT&T is priced for catastrophe.
It's certainly true that AT&T's debt adds a layer of risk that some investors likely aren't comfortable with. The debt story should improve over the next few years, assuming the company's debt reduction plans don't get derailed by a worsening economy.
While AT&T's debt is concerning, this is a company that operates in a triopoly with high barriers to entry, and its free cash flow generation is more than enough to fund its dividend and make meaningful progress paying down the debt. With a valuation that's almost shockingly low, it's hard to see AT&T stock as anything but a screaming bargain.
