AT&T (T 1.02%) has frustrated investors for years. Costly missteps, a massive debt burden, and a dividend cut after years of annual increases progressively soured investors, so much so that it reversed 30 years of gains!
After such a track record, investors may understandably struggle to believe in this stock again. Nonetheless, with a robust 5G market and a low valuation, it could be time for investors to turn bullish.
AT&T is well into a historic turnaround
Despite its challenges, the company's situation has continued to improve since spinning off DirecTV, and the media business which now is part of Warner Bros. Discovery. The latter spinoff led to a cash infusion of more than $40 billion. That allowed AT&T to reduce its debt dramatically, though, at over $143 billion, its total debt level remains a heavy burden.
Also, further improvement came from its dividend cut, which slashed expenses by approximately $6.5 billion annually. And despite the cut, the $1.11 per share annual payout earns shareholders a dividend yield of 7.6%, well above the 1.6% average cash return of the S&P 500.
Moreover, its greater focus on the wireless business seems to have paid dividends of a different kind. AT&T Fiber has increased net adds by over 200,000 per quarter for 14 straight quarters. Additionally, the company claims approximately 750,000 postpaid phone net adds in the last two quarters.
Consequently, AT&T now claims 46% of the wireless service market. This is a dramatic improvement from 34% of the market 10 years ago and has also led to the company gaining market share from both Verizon and T-Mobile.
Image source: Strategy Analytics, FierceWireless, Statista, Verizon, Sprint, T-Mobile, AT&T, and US Cellular.
AT&T financially speaking
This improvement has not appeared in all its numbers. The company's revenue for the first six months of 2023 came to $60 billion, but that was only a 1% increase compared with the same period in 2022.
Still, that modest increase did not preclude more dramatic improvements in its free cash flow. Free cash flow during the year's first half came to $5.2 billion, up from $4.2 billion in the year-ago period.
Moreover, the company forecasts at least $16 billion in free cash flow for the year. That free cash flow gives AT&T more than enough cash to cover the $8.5 billion in current dividend obligations, assuming another possible obligation does not significantly affect the company.
The stock fell in July as a Wall Street Journal investigation found lead-covered cables installed decades ago had become an environmental hazard. AT&T says tests on some of its cables have shown no public health risk, but that issue still creates uncertainty for the company's finances overall and could ultimately affect the dividend.
Nonetheless, investors should also note that AT&T has risen significantly since its July low. It is too early to declare a recovery given the stock's history, but at a price-to-earnings ratio of 7, it seems cheap when considering the likely turnaround in AT&T's trajectory.
Investing in AT&T stock
The financial health of AT&T certainly warrants scrutiny before making an investment decision. The sluggish revenue growth is a red flag, despite the positive uptick in customer numbers for its fiber and wireless segments. Moreover, there's a looming financial burden tied to the remediation of lead-coated cables, which could potentially strain AT&T's ability to maintain or even offer dividends, especially given the existing high debt levels.
However, with a price-to-earnings ratio of 7, the telecom behemoth presents a value proposition that's hard to ignore. And with its market share and revenues on the rise, the decades-long downtrend may finally be positioned to change direction.
