The U.S. stock market, characterized by the S&P 500, has been on a tear since the artificial intelligence (AI) revolution began in early 2023. The index has risen approximately 24% over the past year alone, dwarfing its historical annualized average of about 10%.
Yet, a popular high-yield dividend stock has trounced the market, with total returns exceeding 63% over the past year. Which stock can claim such impressive returns? It's not an AI company or "Magnificent Seven" stock, but AT&T (T 0.39%), showing that market-beating investment returns can come from almost anywhere. Now that the stock has your attention, is AT&T's eye-popping rally over, or is it just getting started?
AT&T's recent rally boils down to the company's financial strides following a tumultuous decade
You probably know AT&T. The company has been around for generations and is one of three primary wireless network operators in the United States, along with Verizon Communications and T-Mobile US. Investors may also know that AT&T stock has long offered a big dividend and little else. The stock price is virtually flat over the past decade -- even after the recent rally.
NYSE: T
Key Data Points
So, why has AT&T done so well lately? The company spent most of the past 10 years paying for expensive mistakes. It spent billions of dollars on blockbuster acquisitions to compete in streaming and entertainment, but it backfired. AT&T eventually abandoned the idea but was left with a mountain of debt totaling approximately $200 billion as recently as 2022.
To its credit, AT&T has done a great job deleveraging over the past few years. It slashed its dividend and used the cash raised from spin-offs and divestitures to bring its debt down to $123 billion. The stock's price-to-earnings (P/E) ratio bottomed at just 5.4 in 2022, which unleashed recent gains as sentiment improved and lifted AT&T's valuation to more than 12 times 2025 earnings estimates.
Recent success doesn't change AT&T's core identity
The company can continue paying down its debt. AT&T's dividend payout ratio is only about 44% of the free cash flow the business generated over the past four quarters ($18.5 billion). That leaves roughly $10 billion in annual cash flow to continue throwing at its debt. By extension, investors can continue counting on AT&T's dividend, which still yields more than 4.2%.
AT&T is popular among retirees and other income-focused investors, and that probably won't change. But those looking for more of what AT&T delivered this past year should pump the brakes. I get it. AT&T has been a big winner, and the stock's P/E ratio is still far below that of the S&P 500.
Unfortunately, AT&T is not growing very fast. The company had a solid fourth quarter of 2024, including 482,000 net phone additions to a 72.7 million subscriber base. Yet its core wireless business only grew revenue by 3.3% year over year in Q4, and declines in other business units dragged total revenue growth down to just 0.9%. Analysts estimate AT&T will still grow earnings by an average of just 4% annually over the next three to five years.
The stock's rally had more to do with an overly depressed valuation than anything.
Should investors continue buying AT&T?
That's not to say that AT&T can't still rise. Last year, the Federal Reserve began cutting the federal funds rate, which lowers the yield on traditional cash safe havens like high-yield savings accounts. That's helped fuel AT&T's rally, and further rate cuts could make it even more appealing to savers looking for alternative sources of investment income.
AT&T's recent run has been a fun example of what can happen when the market becomes overly pessimistic about a stock. Unfortunately, this valuation-fueled story has primarily played out. A P/E ratio of about 12 is more than fair for a business growing earnings at a low-single-digit rate. If AT&T's price were to keep climbing, it would not be too far from becoming overvalued.
Therefore, AT&T has become a hold. Bargain hunters won't find compelling value in it anymore, and with its yield now just over 4%, dividend investors can probably find better yields elsewhere.
