Telecom giant AT&T (T 3.86%) has been through a lot in recent years.
The company's foray into entertainment media operations ended with the spinoff of WarnerMedia to create the new Warner Bros. Discovery (WBD 0.73%) company. AT&T has been losing broadband customers in every recent quarter, but postpaid wireless contracts and Internet of Things connections are picking up speed. And Ma Bell's dividend yield is a beefy 7.5% -- but that's a far cry from the double-digit yield seen in 2021 and 2022.
Meanwhile, AT&T's stock is down by 32% from the all-time highs of early 2020, all measured in dividend-adjusted total returns. Without the boost from reinvested dividends, this stock has offered negative returns of 67% since its peak in 1999.
However, some investors expect AT&T to mount a turnaround from this gloomy trough. If so, the stock could be a great buy at these modest prices.
Does that theory hold water? Let's find out.
NYSE: T
Key Data Points
Reasons to buy AT&T stock today
First of all, you already saw the historically low stock price. AT&T's shares are trading near 30-year lows right now. Including the dividend effects makes a big difference, but this stock has still generated one-third of the total returns of the S&P 500 (^GSPC +0.83%) index over the same three-decade period.
As a result, this stock is changing hands at the bargain-bin valuation of 0.9 times trailing sales, 7.1 times free cash flow, and 5.8 times forward earnings projections. These values sit far below head-to-head rivals Verizon (VZ 1.31%) and T-Mobile US (TMUS 1.84%), though Big Red's valuation comes close.
You could call it a disaster, or you could call it a buying opportunity. Either way, Ma Bell's stock is on sale nowadays.
At the same time, the company is trying a bunch of new strategies to get the stalled business results going again. The WarnerMedia era is over. AT&T's 5G wireless network now offers almost complete coverage across most major cities in America, Canada, and Mexico. Shutting down older networks that nobody uses anymore helped the company complete a $6 billion cost-cutting program and start another one with a $2 billion saving target over the next three years.
So AT&T has a few things going for it. The company is modernizing its network, reducing operating costs by the billions, and generating reasonable revenue growth in spite of soft subscriber trends. If anything, the buzzword combo of 5G networks and Internet of Things devices should keep Ma Bell busy and relatively prosperous over the next few years. And you get a juicy dividend yield at this low-priced entry point.
Reasons to stay away from AT&T, even now
Maybe AT&T's stock is cheap for good reasons.
- The modest top-line growth in the second quarter sprung from higher service prices, not subscriber additions.
- As part of the WarnerMedia spinoff process, AT&T cut its quarterly dividend payouts in half. The company's streak of annual payout increases stretched from 2007 to 2020, followed by a 50% decrease last year. These are not the actions of a financially healthy company with tons of excess cash profits -- it's what high-paying dividend kings do when the cash is sorely needed for other purposes.
- And let's not forget about the potential legal fallout from the lead-based cable scandal. The ongoing class action lawsuit may result in severe financial damage while undermining AT&T's reputation as an environmentally conscious business.
- Pick your favorite financial metric, and I can probably show you a negative long-term trend in AT&T's quarterly filings. The company is saddled with $143 billion of long-term debt, reflecting the high costs of building, maintaining, and operating wired and wireless networks on a nationwide scale.
With these fireballs in the air, I can't blame AT&T investors for keeping the stock price low.
So, is AT&T stock a buy today?
I keep reviewing AT&T's business prospects, hoping to find a reason for honest optimism. A few of those popped up this time, but the company was still saddled with too many fundamental problems for my taste. Unfortunately, I would argue that this stock is cheaper than Verizon and T-Mobile for several good reasons. T-Mobile strikes me as a better telecom investment for most people.
It may be a different story if you absolutely require sky-high dividend yields. AT&T offers one of the 10 richest yields among the S&P 500 components and would have been number one with a bullet if it hadn't slashed the payouts in 2022. But even then, Verizon provides an even stronger yield at 8.6%, with profit margins and more robust sales growth.
So I gave AT&T a shot, but it didn't come up aces. Until further notice, I wouldn't recommend this stock to value investors, dividend hunters, or growth chasers.
