After spending several years in the doghouse for many investors, AT&T (T) is firing on all cylinders and returning to its winning ways. I previously highlighted AT&T as an opposite bet in early 2024, when the stock was trading at $17.31, and the stock has performed well since then, gaining more than 35%. I remain bullish on the telecom giant because of its more focused and streamlined approach to the business, its commitment to returning capital to shareholders, its attractive dividend yield of 4.9% and its undemanding valuation.
For years, AT&T was known as a loyal dividender, and many investors relied on the Dividend Aristocrat for reliable dividend income every quarter. AT&T damaged its reputation with many of these investors when it cut its dividend in 2022 amid the Warner Broth spinoffers, who merged with Discovery to form Warner Bro Discovery (WBD). However, the move to spin off Warner Brothers seems like the right decision in hindsight as the stock languishes amid a series of difficulties.
Meanwhile, AT&T is quietly getting back into the good graces of dividend investors. The stock yields an attractive 4.9%, well above the market average and above that of government bonds, at a time when interest rates are likely to continue falling. Furthermore, AT&T’s dividend appears safe and secure after the 2022 cut, with a dividend coverage ratio of just under 50%. This week at Analyst & Investor Day, AT&T outlined its multi-year strategic vision, outlining plans to return $40 billion to shareholders over the next three years.
This will be done through a combination of $20 billion in dividend payments and $20 billion in share buybacks. This includes an initial share buyback authorization to buy back $10 billion of shares by the end of 2026. Share buybacks benefit investors because they reduce the number of shares outstanding (thereby increasing earnings per share) and can signal that management views shares as undervalued. Buybacks can be especially positive for stocks that pay a large dividend, because each share bought back is a stock on which they no longer have to pay the dividend.
AT&T’s Investor Day reaffirmed the fact that AT&T prioritizes returns for shareholders, and it was also a good reminder that this is a more streamlined business than it was just a few years ago. Its moves to enter the entertainment world by purchasing DirectTV in 2015 and Time Warner in 2018 can only be described as major missteps.
But the good news is that management has recognized these mistakes and gotten rid of them by divesting Warner Brothers via the aforementioned 2022 spin-off and recently exiting DirectTV by selling its remaining 70% stake in the company to TPG sales, a transaction expected to be completed in 2022. 2025. These divestitures of support businesses helped AT&T reduce its debt by $25 billion. They also allow AT&T to focus on its bread and butter. As AT&T said at the time of the DirectTV sale, “This sale allows AT&T to continue its focus on being the leading 5G wireless and fiber connectivity company in America.”
AT&T says its goal is to have 50 million fiber locations by 2029 and complete the modernization of its 5G network by 2027. AT&T says investments in fiber and its 5G network have delivered strong returns for the company as it has delivered approximately 10 million additional fiber locations. mobile service subscribers since mid-2020, while annual mobility service revenue is growing by $9 billion annually during this period. Meanwhile, it has nearly doubled revenue from fiber customers over the past three years.
Shares of AT&T are up about 40% in the past year. But the good news for investors is that even after this massive run, stocks are still incredibly cheap.
In fact, shares trade for just 10.7 times consensus 2025 earnings estimates. This is less than half the broader market’s valuation; the S&P 500 (SPX) trades for more than 25 times earnings. Stocks with such lower valuations may be more defensive, an attractive feature at a time when the S&P 500 is trading at record highs and well above historical valuations. Moreover, this undemanding multiple leaves plenty of room for gains if AT&T keeps going.
As for Wall Street, T gets a consensus rating of Moderate Buy, based on nine Buys, four Holds, and zero Sell ratings assigned in the last three months. The average AT&T stock price target of $24.15 implies 1.3% upside potential from current levels.
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I remain bullish on AT&T stock. Even after a strong performance over the past year, shares still look extremely cheap, trading at less than 11 times forward earnings or less than half the market multiple. At a time when the S&P 500 has reached all-time highs, it’s not a bad idea for investors to have a few cheaper, defensive names in their portfolios.
I’m also bullish on the stock based on its attractive 4.9% dividend yield and management’s intense focus on returning capital to shareholders through a combination of share buybacks and dividend payments worth $40 billion over the next three years. While the company has made some missteps in the past, current management has corrected many of these mistakes, laid out a well-articulated vision and focused on streamlining the business and rewarding shareholders, making AT&T a strong buy in my view become.
