AT&T (T 1.02%) claimed its divestments of DirecTV in 2021 and WarnerMedia in 2022 would herald a new beginning for its aging business. The sales did mark an end to the telecom giant's ill-advised attempt to become a media titan, and the newly streamlined company declared it would focus on growing its core wireless and wireline businesses.
But after merging WarnerMedia with Discovery to create Warner Bros. Discovery (WBD -2.17%) last year, AT&T's stock has underperformed the market by a wide margin. The two stocks started trading separately on April 11, 2022.
Since that fateful day, AT&T's stock price is down 22% as the S&P 500 stayed nearly flat. Its investors also received 0.24 shares of Waner Bros. Discovery for each share of AT&T they held, but the former has also plummeted more than 50% since its market debut. Let's compare the bear and bull cases to decide if AT&T is still a worthwhile investment.
An employee in an AT&T store. Image source: AT&T.
What the bears will tell you about AT&T
The bears will point out that AT&T's wireless growth is cooling off, its business-wireline segment is deteriorating, and it faces troubling safety concerns regarding its cables.
AT&T's wireless business gained nearly 2.9 million postpaid phone subscribers in 2022, then added 424,000 more in the first quarter of 2023. But in the second quarter, it only added 326,000 postpaid phone subscribers. That broadly missed analysts' expectations and ended its 12-quarter streak of gaining at least 400,000 postpaid subscribers.
That slowdown was likely caused by intense competition from Verizon Communications and T-Mobile, sluggish sales of new smartphones, and persistent headwinds related to consumer spending. Amazon's recent expansion into the wireless market via a partnership with Dish Network could exacerbate that pain.
AT&T's business wireline revenue also continues to decline as the market's demand for its legacy voice and data services dries up. That business should remain weak as more companies streamline their communications with cloud-based services like Zoom Video Communications. It's trying to offset that slowdown by expanding its fiber networks, but those newer connections still only account for a small part of its broadband business.
Analysts still expect total revenue to rise 1% this year, but they also expect its loss-leading wireless promotions and higher investments in 5G and fiber networks to reduce its adjusted earnings per share (EPS) by 6%.
That slowdown isn't disastrous, but AT&T still faces questions regarding the safety and environmental impact of its older lead-sheathed copper cables. Some analysts believe it could potentially spend billions of dollars to replace those legacy cables, reducing its free cash flow (FCF) and forcing it to slash its dividend again.
What the bulls will tell you about AT&T
The bulls still love AT&T because it's growing faster than Verizon, the fiber business is expanding at a healthy clip, it's reducing its debt, its FCF growth is steady, and the stock is cheap.
AT&T's wireless growth might be cooling off, but its growth rates still look robust when compared to Verizon's latest numbers. Verizon only gained 201,000 wireless postpaid phone subscribers in 2022. It lost 127,000 subscribers in the first quarter of 2023 and added a mere 8,000 subscribers in the second quarter.
AT&T's fiber business might not be growing fast enough to offset the secular decline of its business wireline unit yet, but it's still turning in some impressive numbers. It gained 251,000 fiber subscribers in the second quarter, which represented the segment's 14th consecutive quarter of at least 200,000 net adds.
AT&T's debt-fueled acquisitions of DirecTV, TimeWarner, and advanced wireless services (AWS-3) spectrum licenses caused its debt to soar over the past few years. However, it plans to trim its total costs by $2 billion over the next three years to reduce its ratio of net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to 3 by the end of 2023 and 2.5 by the end of 2025.
During a recent Bank of America conference, AT&T chief financial officer Pascal Desroches reiterated the company's goal of generating at least $16 billion in FCF in 2023. That update suggests it can easily cover its dividends -- which consumed $10 billion of its FCF in 2022 -- and that it has plenty of room for future dividend hikes and share buybacks.
Lastly, analysts expect the company's revenue and adjusted EPS to grow by 1% and 3%, respectively, in 2024. Those rates might seem anemic, but AT&T's low forward multiple of 6 and high forward dividend yield of 7.3% should limit its downside potential.
Which argument makes more sense?
AT&T faces a lot of near-term challenges, but it's tough to be too bearish on this blue-chip stalwart when its valuation is so low and its dividend is so high. The market probably won't warm up to AT&T anytime soon, but it could be a great place to park your cash and earn some income until the macro environment improves.
