Shares of telecom giant AT&T (T 1.02%) have been stuck in a rut for much of 2023. Slowing subscriber growth, an uncertain economic outlook, mountains of debt, and fear that the company's free cash flow outlook was overly optimistic put downward pressure on the stock.

While the economy is no less uncertain than it was earlier this year, AT&T is looking like a safer bet. Postpaid phone subscriber gains accelerated in the third quarter, churn remained low, and the company boosted its free cash flow outlook. AT&T now expects to deliver full-year free cash flow of $16.5 billion, up from a prior outlook of at least $16 billion.

Since bottoming out in July, shares of AT&T have rallied nearly 20%. Even after bouncing off that low, the stock remains priced for disaster. While conditions in the wireless industry could certainly degrade, AT&T stock is too inexpensive to ignore.

Rock-bottom valuation and sky-high dividend

Based on AT&T's updated guidance, the stock trades for less than 7 times free cash flow. Put another way, AT&T sports a free cash flow yield of about 14.5%.

AT&T isn't going to grow very quickly, so it certainly doesn't deserve to trade at a premium to the broader market. But it also doesn't deserve to trade at such an enormous discount. Over the past five years, the S&P 500 has had a price-to-free cash flow ratio generally between 2 and 4 times that of AT&T.

Free cash flow is being driven by solid subscriber gains in the wireless and fiber internet businesses, as well as meaningful cost cuts. The company tacked on 468,000 postpaid phone subscribers in Q3, along with 296,000 fiber subscribers. Meanwhile, AT&T is in the early stages of finding $2 billion in cost savings over the next three years.

With AT&T's free cash flow generation looking to be on solid ground, the company's dividend looks safer today than it did earlier this year. Based on the latest quarterly dividend payment, AT&T will pay out just shy of $8 billion in dividends over the next year. With the new guidance, that's now less than half of the projected free cash flow.

Dividend growth will be slow at best as AT&T works to pay down its debt, but even so, the stock currently offers a dividend yield of about 7%.

Some risks to consider

AT&T has a lot of debt on its balance sheet. That's par for the course for telecom companies, but AT&T's failed attempt to turn itself into a media conglomerate via pricey acquisitions made the situation worse. As interest rates rise and AT&T refinances portions of that debt, increasing interest payments could put pressure on free cash flow.

The good news is that AT&T's debt maturities are spread out. Over the next two years, the company plans to use cash on hand to handle debt maturities as part of its plan to lower its debt load. Nearly all of AT&T's debt carries a fixed rate, which averages just 4.2%, and the average maturity is 16 years. Rising interest rates will eventually catch up with AT&T, but not anytime soon.

Beyond debt, the biggest risk for AT&T is the state of the economy. Smartphone upgrades look less appealing when household budgets are tight. That's a double-edged sword. On one hand, AT&T's existing customer base upgrading less often creates fewer opportunities for those customers to jump ship by taking advantage of a promotion from one of AT&T's rivals. On the other hand, the same is true for other wireless providers as well.

There's also the potential for subscribers to start trading down from pricey unlimited plans. This doesn't appear to be happening yet -- AT&T's most expensive unlimited plan grew the fastest in Q3. However, this situation could reverse in a recession.

While AT&T is certainly not a risk-free stock, a beaten-down valuation more than compensates investors for the risks facing the company.