Is AT&T Stock A Buy?

AT&T Inc (NYSE:T) is an international conglomerate that’s moving back to its telecom roots. It bought both DirecTV for $49 million and WarnerMedia for $85 million in the 2010s only to turn around and sell them in the 2020s.

What was once considered an elite dividend stock by investors failed to show any growth in the past year. Freeing up capital with these sales is giving the market reason to pay closer attention. As a financially leaner corporation, it has the opportunity to compete more closely with rivals like Verizon Communications Inc (NYSE:VZ).

Its stock has been suffering over the past couple of years, underperforming the S&P 500 (SPY) by a large margin. Is AT&T (T) stock a buy now that it’s shedding weight to focus on its core businesses?

Verizon also sold its media business, which includes Yahoo and AOL in 2021 in a similar slimming down move.

Investors have something to look forward to as they’ll gain shares in the WarnerMedia spinoff to Discovery. This could make the company enticing from a value perspective for those looking to invest in the next generation of wireless.

Let’s check the signal to see if AT&T will provide clear returns to investors.

72% Of AT&T Revenues Stem From Mobility & Broadband

AT&T is a carrier of both fixed and mobile networks, along with telecom services. While it briefly dabbled in video content through its DirecTV and Warner acquisitions, they weren’t a significant part of its sales.

Most of its revenue is derived from its mobility and broadband business, along with enterprise services. This segment provides about 72 percent of the company’s revenues, which should obviously increase once the selloffs are complete.

And it’s not just involved in the U.S. – AT&T has a Latin American division that’s heavily involved in satellite and streaming technology in Latin America and the Caribbean, while it offers wireless services and equipment in Mexico too.

The company came a long way from the antitrust action imposed on it in the 1980s. In fact, that chapter of AT&T history is becoming more important as the government pursues antitrust action against big tech in recent years.

What Happened to AT&T Stock in 1984?

Prior to the advent of wireless cell phones, the entire United States and Canada communicated through the Bell System. It was created by Bell Telephone Company, founded by telephone inventor Alexander Graham Bell, who also co-founded the American Telephone and Telegraph Company (AT&T) in 1885.

Because the physical phone lines were owned by only one company, it set the prices with no competition. And the high-cost barrier to entry made it unlikely anyone else ever could compete until fiber optics and other high-speed/high-bandwidth options replaced traditional analog telephonic equipment.

It had long been decried as a monopoly as early as 1910, and the U.S. Department of Justice filed an antitrust suit against AT&T in 1974. Ten years later in 1984, the company was broken into seven regional companies, known as the Baby Bells.

Four of the seven regional companies are now a subsidiary of the company you know today as AT&T, while two merged to become Verizon Communications and the final is now Lumen Technologies.

AT&T is still a major player in the telecom, and that’s why it’s shedding parts of its business again to regrow using the same strategy that has worked well for over a century.

AT&T Financial Outlook

AT&T financials are showing signs of strength, despite the stock price not reflecting it. Its Q2 revenues of $44 billion are up 7.6 percent from the same quarter in the prior year, with diluted EPS of $0.21 representing a 23.5 percent jump.

The company also has free cash flow in the $27 billion range and maintains one of the most consistent high-paying dividends on the market. It pays an astonishing $0.52 per share per quarter and continued its dividends through the pandemic.

Selling DirecTV is expected to lower that free cash flow by about $26 billion per year. Meanwhile, it’s freeing up at least $3 billion in operational costs by offloading WarnerMedia, offloading $43 billion in debt, and nearly canceling out the net effect on the free cash flow.

It still maintains 70 percent ownership of the new DirecTV, which will provide another $1.2 billion in equity income. That has investors wondering whether they should buy and hold AT&T stock.

Is AT&T a Buy, Sell, or Hold?

AT&T’s financials aren’t much different than competitors in the telecom industry; it is asset-rich but debt-laden. Just like in the 19th and 20th centuries, AT&T is part of an elite oligopoly that controls most communications in North America and beyond.

Gartner forecasts revenue on worldwide 5G network infrastructure will grow 39 percent to $19.1 billion this year. By 2024, it will be the dominant commercialized service in Tier 1 cities, and AT&T, Verizon (VZ), and T-Mobile each maintain essentially equal third shares of the industry.

With its financial books on the mend, this could be a great time to invest in AT&T, especially if you get in before the WarnerMedia spinoff grants shareholders free stock in the new entity. 

Where Will AT&T Stock Be?

Although it provides a great dividend, reinvesting that payout and factoring in the compound interest associated with such dividend reinvestments still grossly underperformed the S&P 500 over the past couple of years. The stock is down over 30 percent over the past five years, and that effectively has wiped out its dividend.

It’s undervalued, but it’s not guaranteed to grow. And even the most conservative of investors may find better overall returns from other divided-paying stocks.

From a discounted cash flow analysis perspective, fair market value lies north of where the stock currently sits. AT&T intrinsic value is around $32 per share.

Is AT&T Stock A Buy: The Bottom Line

AT&T is a juggernaut in the telecommunications industry and has been so since the invention of the telephone in the 1800s. It’s always been a major player in the phone industry, and that’s likely to continue well into the next century.

The company is one of the highest-paying dividend stocks on the market. It’s also shedding non-core businesses to streamline operations and prepare for a battle against its rivals. It may not lose much value, but the real question remains how much money investors will gain moving forward. For now there’s every reason to remain skeptical until the numbers prove otherwise.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.