If you've been an AT&T (T 0.40%) shareholder for some years now, I'm sure I don't have to tell you how turbulent a ride it has been. The telecom giant is down by more than 34% in the past three years, due to a handful of missteps by company management and a pessimistic outlook among investors.
With its stock hovering near a 52-week low, it may be tempting to lose faith in the telecom giant. However, before writing the company off, here are three things to consider.
NYSE: T
Key Data Points
1. The dividend is safer than some investors think
Like other telecom stocks, AT&T doesn't typically attract investors for its share price growth potential. It's all about the dividend. AT&T's quarterly payout is $0.28 per share. At the current share price, that gives it a trailing 12-month yield of around 7.5%.
AT&T's yield is among the highest in the S&P 500, but dividend yield alone should never be the sole reason for buying a stock. A lucrative dividend is only truly lucrative if it's sustainable, and that's been a concern for AT&T investors in recent times. However, I think their concerns are overblown.
In its second-quarter report, AT&T's management reaffirmed its guidance for $16 billion (or more) in 2023 free cash flow, with $11 billion of that coming in the second half of the year. For perspective, AT&T expects to pay out around $5 billion in dividends and distributions.
Data by YCharts.
Free cash flow is a key factor in a company's ability to maintain its dividend, so the guidance from AT&T should be encouraging to investors who may have been skeptical about its security.
2. The company is actively reducing its debt
One of the bigger causes for concern with AT&T has been its huge debt. Telecom, in general, is a debt-intensive sector, but AT&T has outpaced many of its peers in the wrong direction. At the end of Q2, AT&T's debt was $143.3 billion. A heavy debt load is never ideal, but it's especially painful when interest rates are high, as they are now.
Its net debt -- total debt minus cash and cash equivalents -- is $132 billion, but to AT&T's credit, it has been diligently paying it down. It has reduced it by $20 billion in the past three years.
From the $11 billion in free cash flow it expects to book in the second half of 2023, AT&T plans to knock down its debt by an additional $4 billion. How much it can pay off annually remains to be seen, but it's obviously a priority for the company. Most of its free cash flow after dividend payouts will go toward that end.
A company's net-debt-to-EBITDA ratio can indicate how long it'll take to pay off its debt. It tells you roughly how many years of earnings would be needed to pay off the debt, so the lower that ratio is, the better. AT&T's ratio is expected to be around 3 by the end of the year, with it on track to lower to 2.5 by the first half of 2025.
Twelve figures' worth of debt won't disappear overnight, but its aggressive debt-reduction plan and anticipated free cash flow suggest AT&T has a path toward bringing its debt down to manageable levels.
3. Current prices give it way more upside than downside
A secure dividend provides shareholders with a natural margin of safety because investors get those payouts regardless of stock price performance. But AT&T has another margin of safety that shouldn't be overlooked: It operates in an indispensable industry.
Between its broadband services, mobile communications, and various enterprise solutions, AT&T offers services essential to daily American life. When it comes to telecom companies, it's AT&T, Verizon, and T-Mobile, and then everybody else.
That alone doesn't make a company a good investment, but it does give a company like AT&T that's trading at historically low levels a lot more upside than downside. Its price-to-free-cash-flow ratio is just under 6 -- almost 30% lower than it was just a year ago. It's also much lower than the ratios of Verizon and T-Mobile -- 11.8 and 43.9, respectively.
Data by YCharts.
AT&T offers investors a lower-risk, potentially high-reward investment opportunity. The stock should be a reliable income source for quite some time.
