AT&T (T +0.51%) is one of the oldest and largest telecom companies in the U.S., with roots going back to 1876. These days, however, the stock has been synonymous with underwhelming returns and plenty of disappointment. Its 2018 merger with Time Warner didn't pan out, as the company has gone from focusing on growth and expanding into streaming to now just being a regular telecom provider again. But that might not be a bad fit for the business, especially if it can sustain its high dividend, which today yields 7.3%.
CEO John Stankey is optimistic that the company is heading in the right direction. And it may only be a matter of time before the stock begins to turn things around.
The CEO believes AT&T's stock is undervalued
Year to date, shares of AT&T are down 18%. Over a period of five years, they have declined by more than 40%. The stock's abysmal performance has pushed up its yield to more than 4 times the S&P 500 average of just 1.6%. Investors, however, appear to have doubts about the yield, as there isn't a big rush to buy the stock.
However, Stankey believes that the stock price is undervalued and due to increase. At a tech conference in San Francisco this month, he said: "It disappoints me that maybe folks aren't willing to bid the stock up to what I think is the fair value." Stankey says that the company is still in the midst of a transition. Last year, it spun off its stake in WarnerMedia, which is now part of Warner Bros Discovery.
NYSE: T
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What does the company need to do to turn things around?
AT&T's business isn't in horrible shape. The company has reduced its net debt by approximately $20 billion over the past three years, and it has been generating growth among fiber and postpaid phone subscriptions.
Stankey says that AT&T's goal is simple -- "We just need to every day come in, run it [the business], and do our best," -- and that by doing so, the company can achieve its goals and win over investors. One of the key goals it has set for the year, which would be a big win, is generating $16 billion in free cash flow. That's one that investors may be feeling a bit unsure of these days.
During the first quarter, which ended on March 31, the company's free cash flow totaled just $1 billion. In the second quarter, free cash flow improved to $4.2 billion -- but that also means its year-to-date total is $5.2 billion, which is well short of the halfway mark. Management, however, remains confident in being able to reach its target of $16 billion for the full year.
Given the company's underwhelming performance over the years, investors may be looking at the business with a healthy dose of skepticism. If, however, AT&T does deliver on its ambitious goal for free cash flow, it could certainly go a long way toward making investors more bullish on the stock, as it would also suggest the dividend is safe. Simply hitting its goals may be enough for AT&T to turn its doubters into believers.
Should you buy shares of AT&T?
AT&T hasn't been doing badly, but there hasn't been much to get excited about with the stock. The company believes it's on a positive trajectory, but investors remain unconvinced. There is the potential for the stock to be a big winner should AT&T come through on its forecast. At just 6 times its estimated future earnings, the stock could make for a good value buy right now, although it does come with some risk. And in the long run, as economic conditions improve, the business should be more stable.
It's not the safest of dividend stocks to be holding right now, but it can make for an underrated one given its low valuation and the possible upside it possesses -- the stock hasn't been trading this low in decades.
