Telecom giant AT&T (T 1.02%) has seemingly hung around the $20 mark for years. Today, shares are trading hands at $17. The stock has underperformed the S&P 500 due to a bloated balance sheet and lack of earnings growth.
However, things could finally be looking up. AT&T is slimming down and focusing on what it does best: telecommunications. It also cut the dividend enough to free up cash to help pay down debt.
Is this enough to move the stock higher? Should investors buy the stock while it's under $20 per share? Here are three things you must know to decide.
1. AT&T is still a dividend machine
Most people buy AT&T stock for the dividend. Management's decision to slash the dividend in 2022 must have been tough, but it's proving to have been the right move. You can see below how much the smaller dividend has freed up AT&T's cash flow. The company's dividend payout ratio is now a healthy 40%, translating to $12 billion in cash left over after capital expenditures (investments into the business), interest expenses, and dividends.
T Cash Dividend Payout Ratio data by YCharts
Yep, that's discretionary cash profits that can go toward paying down debt (more on that in a minute) and eventually repurchasing shares to help drive earnings growth. The best part? AT&T is still a high yielder. Investors are getting a 6.5% starting dividend yield at the current share price.
2. The balance sheet is healing, albeit slowly
AT&T's most significant problem for years was the debt from its ill-fated DirecTV and Time Warner acquisitions -- nearly $200 billion from the Time Warner deal alone. So much debt created billions in interest expenses that suffocated profits.
The company got a hefty cash infusion from spinning off Time Warner in the spring of 2022 and has made further progress in deleveraging to just over 3 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). There is still work to be done, but annual interest expenses have already fallen nearly $2 billion from their 2019 peak of $8.4 billion.
T Total Long Term Debt (Quarterly) data by YCharts
Having billions of dollars in excess cash each year is an excellent sign that progress will be made. It's taken years to reach this point, but investors can finally be optimistic about AT&T's finances.
3. Customer acquisition could spark growth
AT&T is America's largest wireless carrier, which puts a target on its back for its primary competitors, Verizon Communications and T-Mobile. However, AT&T had a great 2023, picking up new customers. Post-paid phone subscribers grew by 1.7 million year over year in the fourth quarter, while fiber optic internet customers increased by 1.1 million. Adding customers is the best way AT&T can drive top- and bottom-line growth.
For 2024, AT&T guided wireless network revenue growth of at least 3% and broadband growth of at least 7%. This is promising and lays the path for earnings growth if management can continue paying down debt. Interest expenses take away from earnings, so every dollar saved on interest will flow to the bottom line.
Should investors buy under $20?
Today, at $17 per share, AT&T trades at a forward P/E of 7.5. That sets a low bar for solid investment returns when you factor in the stock's starting 6.5% dividend yield. Analysts believe earnings per share will grow roughly 3% annually over the next several years.
Still, 3% earnings growth plus that dividend is nearly 10% total returns annually. Long-term investors can collect the dividend while waiting for debt to go down. The eventual tailwinds of smaller interest payments should boost earnings, boosting investor sentiment, which should theoretically award a higher valuation to the stock.
Nothing is guaranteed, and this could take a few more years to play out. But if you're patient, the argument for buying AT&T at today's price is a solid one.
