If you had to choose a stock for the investing hall of shame over the last decade, AT&T (T 0.18%) would be a good candidate.
It's made two of the worst acquisitions of this century, spending more than $100 billion combined for DirecTV and Time Warner and paying a peak price for two vestiges of the traditional pay-TV ecosystem that were already showing signs of decline.
As for its core phone business, the company struggled to grow revenues and has lost market share to more nimble competitors like T-Mobile. As a result, the stock hit a 30-year low earlier this year.
However, CEO John Stankey has promised to eliminate distractions and focus on the core telecom business, and the company's third-quarter results show those efforts starting to pay off.
Slow and steady progress
The stock finished up 6.5% Thursday as it raised its free cash flow guidance, and edged out top- and bottom-line estimates. It now expects free cash flow guidance of around $16.5 billion this year, up from a previous target of at least $16 billion. It also expects full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 4%, up from its earlier forecast of at least 3%.
Revenue rose 1% to $30.4 billion in the quarter, ahead of the consensus at $30.19 billion, and adjusted earnings per share fell from $0.68 to $0.64, but still topped analyst expectations of $0.62.
The company added 468,000 monthly paying phone customers, bringing its total to 70.8 million, and mobility service revenue, which is its key growth category, was up 3.7%.
Stankey said the company's efforts to invest in the business and improve its value proposition are paying off, arguing on the earnings call:
The tale of the tape is clear. Customers are staying with us longer and spending more with us. Just take a look at our consistent low churn, increasing ARPUs, and improving returns. Why? Because we're providing more value to customers.
Churn for monthly paying phone subscribers fell 5 basis points from a year ago to 0.79%.
Image source: AT&T.
Taking care of business
AT&T continues to expand its 5G infrastructure. Its mid-band 5G spectrum now covers more than 190 million customers, and it's on track to reach at least 200 million by the end of the year.
The company is cutting costs, making progress on its goal of cutting an additional $2 billion or more in costs over the next three years. It's also innovating, launching the AT&T Internet Air fixed wireless residential service, a plug-and-play device customers can set up at home to get wi-fi running in less than 15 minutes.
AT&T's fiber internet is also experiencing solid growth, adding 296,000 new subscribers. Fiber can now reach 20.7 million customers and 3.3 million business customer locations.
Is AT&T stock finally a buy?
AT&T isn't going to wow any investors with 1% revenue growth, but the company is clearly making progress. Its 5% growth in adjusted operating income, reflecting the effect of cost cuts and leverage in the mobility business, qualifies as a victory for the long-suffering stock.
Looking ahead to next year, management has said that it expects capital expenditures to come down from a peak in 2022 and 2023. That should give a lift to free cash flow, though AT&T expects less of a contribution from DirecTV and higher taxes next year. The company is also on track to reach its target of 2.5 times net debt to adjusted EBITDA by the first half of 2025.
Following Thursday's results, AT&T now trades at a price-to-earnings ratio of just 6.1 and offers a 7.7% dividend yield.
With churn improving and postpaid subscriber growth remaining solid, the worst is probably in the past for AT&T's stock. However, the company will have to deliver meaningful growth for the stock to deliver a substantial breakout from here. Income investors can buy the stock for the 7% yield, and get the added bonus of a potential rebound in the stock price.
