Telecom giant AT&T (T 1.02%) gets talked about often in the investing world, but it isn't typically positive. Despite having a commanding market share (47% of U.S. wireless subscriptions in the third quarter) and strong market presence, AT&T's stock has performed as badly as anyone could've anticipated over the past few years. It's now down over 40% from its high over the past five years.
There's no need to harp on the past, though. The company has had some notable missteps, but investing is a forward-thinking game, so we'll focus on that. Considering AT&T's low stock price, many investors are wondering if now's the time to invest. For long-term investors, I believe the answer is yes.
AT&T's high dividend can be a good source of income
You can't talk about AT&T's stock without discussing its dividend. It's been the only thing keeping investors patient while the company tries to steer the ship in the right direction. It's also the primary thing that would attract new investors.
AT&T has one of the highest dividends in the S&P 500, with a trailing-12-month yield of around 6.7%. Unfortunately, part of the reason the dividend yield is so high is because AT&T's stock price has been falling. Regardless, AT&T's lucrative dividend is appealing to investors seeking consistent income.
One reservation about AT&T was its ability to sustain its dividend, but recent results show it can. AT&T made $5.2 billion in free cash flow in the third quarter, bringing the total to $10.4 billion for the year, so far. That's nearly $2.4 billion more than the same time frame in 2022 and plenty more than its dividend obligation.
T Free Cash Flow Per Share data by YCharts
AT&T is getting back to focusing on its roots
AT&T has had ambitious plans in the past decade or so, particularly in the media and entertainment industry. All it led to was high debt levels and an eventual $43 billion WarnerMedia spinoff in April 2022. Not good.
The good news, however, is that AT&T was able to use around $40 billion from the proceeds to reduce its net debt in the second quarter of 2022. After peaking at over $200 billion in long-term debt in 2022, AT&T has since reduced it to around $138 billion (as of Sept. 30, 2023).
Post-WarnerMedia spinoff, AT&T has been taking concrete actions to refocus on its core telecom business.
In early December 2023, AT&T announced it would spend $14 billion over five years with networking and telecom company Ericsson. AT&T said it wants to shift around 70% of its wireless traffic to an Open Radio Access Network system, and this move makes Ericsson AT&T's main supplier of 5G equipment.
Without getting too much into the technical aspects, the move will allow AT&T to modernize its network infrastructure, ideally driving down costs. The transition will be costly for AT&T upfront, but it should be a worthwhile investment if it goes as planned, bolstering AT&T's 5G and fiber networks.
By 2029, 5G is estimated to account for over 71% of the U.S. mobile market. Whichever company can capitalize on the highly competitive postpaid phone market stands to gain a nice piece of the expanding pie. AT&T is already the biggest provider of wireless subscriptions in the U.S., with a 46.9% market share in the third quarter of 2023.
The postpaid phone market isn't a high-growth segment, but AT&T hopes the Ericsson deal can keep the momentum going with the growth of its fiber business. Fiber revenue was up 27% year over year in the third quarter, and considering fiber is only available to around 40% of U.S. households, there are plenty of growth opportunities.
AT&T is one of the premier telecom companies in the U.S., so it's good to see it making investments to enhance its core offerings. It might not have the glitz and glam of media and entertainment, but it puts AT&T in a position for more stable and profitable operations.
You can't gloss over AT&T's low valuation
The recent struggles make it almost impossible to glance over how relatively cheap AT&T's stock is now -- by almost any metric. Whether it's price-to-sales (revenue), price-to-earnings (profit), or price-to-free cash flow, AT&T is trading at much lower valuations than its competitors.
T PS Ratio data by YCharts
A stock being "cheap" doesn't always warrant investing in it, but in AT&T's case, I think it gives the company much more upside than downside. This is somewhat of a transitional period for AT&T, so a low valuation gives investors a chance to get in while the company is potentially undervalued.
