Shares of AT&T (T 0.05%) are trading near multi-decade lows. Bargain hunters are circling and for good reason. Many of the risks the telecom titan faces are arguably already reflected in its depressed stock price. And at these levels, there's likely much more upside than downside for investors who buy the high-yield dividend stock today.
Here are five reasons why.
1. AT&T is seeing strong customer gains
AT&T is winning new wireless subscribers at an impressive clip despite intense competition from T-Mobile and Verizon Communications. The wireless provider added 326,000 postpaid phone customers in the second quarter, as its 5G network continued to prove popular.
The company is also expanding its high-speed internet service. It gained 251,000 AT&T Fiber subscribers, its 14th consecutive quarter of over 200,000 net additions.
With its two most important businesses performing well in the second quarter, AT&T is in a good spot to benefit from the rising demand for connectivity in the years ahead.
2. AT&T generates bountiful cash flow
Customer growth helped AT&T produce $5.2 billion in free cash flow in the first half of 2023, up from $4.2 billion in the prior-year period. Management says it is on track to generate full-year free cash flow of at least $16 billion, up from $14.1 billion in 2022.
To further bolster its cash production, AT&T is targeting an additional $2 billion in cost cuts over the next three years. That's on top of the $6 billion in expense reductions the company has already achieved.
3. AT&T exercises prudent capital allocation
Because of outsized inflation and the Federal Reserve's moves to tame it, AT&T is likely to incur higher interest costs when it refinances its debt in the coming years. So, management is prioritizing debt repayment over dividend increases, which should help to offset the negative effect of higher rates. Reducing its $143 billion debt load will also strengthen AT&T's balance sheet, thereby reducing the financial risks for its shareholders.
4. AT&T pays out hefty dividends
Even without any near-term payout raises, investors are due to receive large amounts of dividend income. AT&T's shares currently yield a sizable 7.9%, making it one of the highest-yielding stocks in the S&P 500 index.
And that dividend is well covered by cash flow. With roughly 7.2 billion shares outstanding and a quarterly cash payout of $0.2775 per share, AT&T pays about $2 billion in dividends every quarter. That equates to $8 billion annually, which is equal to half the projected free cash flow for 2023.
There appears to be plenty of cash to cover both cash payments to shareholders and debt reduction, so AT&T's dividend should be safe.
5. AT&T shares are bargain-priced right now
AT&T's stock price hit its lows in mid-July after The Wall Street Journal reported on the prevalence of lead-covered cables in a portion of the telecom's network. The news stoked concerns among investors about potential cleanup costs, should regulators require it.
Yet CEO John Stankey suggested these fears might be overblown. "Independent experts, long-standing science have given us no reason to believe these cables pose a public health risk," Stankey said during the company's second-quarter earnings call. "And our own prior testing, which we shared publicly, confirms the established science."
Nevertheless, AT&T is working with the Environmental Protection Agency to assess the situation. In the meantime, lingering worries about potential liabilities have its stock trading for less than 7 times its forecast for free cash flow. The costs of a possible environment cleanup are now arguably already priced into AT&T's shares.
The telecom leader's heavily discounted stock price, combined with its high (yet well-covered) dividend yield, should help to lessen any further downside risks for investors. Together with its impressive customer gains and prudent debt-reduction plans, these factors make AT&T's stock an intriguing buy today.
