Source: PaxForex Premium Analytics Portal, Fundamental Insight
Many people prefer to invest in companies that offer vital services or products to their customers. Telecommunications giant AT&T, one-third of the wireless trio in the US, is doing just that. Smartphones have become vital, and it's unthinkable for many not to have Internet access on the go.
At the same time, the stock market doesn't like AT&T stock very much. The stock has been in a downtrend since the start of the pandemic and is down about a third from its multi-year high. Some pessimism in the past has certainly been warranted: AT&T spent a lot of money acquiring media assets but never figured out how to turn them into a media company.
But fortunately, that period at AT&T is now behind it. After spinning off WarnerMedia, which is now part of Warner Bros. Discovery, AT&T has decided to return to its original goals. The company is investing in its wireless network and in a fiber-optic Internet initiative that should provide steady growth in the coming years. The market has not yet warmed up to AT&T, which gives long-term investors a golden opportunity to buy shares at a discounted price.
AT&T is throwing a ton of cash to the wind. The company also spends a lot - building wireless and fiber networks is an expensive undertaking. Last year, after accounting for all of AT&T's capital expenditures, free cash flow was $14.1 billion. This year, the company expects that figure to rise to at least $16 billion.
That cash flow goes mainly to two purposes: paying dividends and reducing debt on the balance sheet. AT&T cut its dividend after the company spun off WarnerMedia, reducing quarterly payments to an acceptable level. The latest dividend payout of $0.2775 per share yields a dividend yield of about 5.6%, and about $8.3 billion will be spent over the next year. If AT&T's forecast comes to fruition, nearly $8 billion remains.
That extra $8 billion will come in handy as AT&T works to reduce its debt. The company paid dearly for its acquisitions of media companies, and some of the debt from those deals still weighs on AT&T. At the end of 2022, the total debt was $136 billion, and interest payments on that debt totaled about $6.1 billion last year.
While this debt is a legitimate negative for investors, AT&T's lowest valuation cannot be ignored. With a market capitalization of $143 billion, AT&T stock trades at just nine times its projected free cash flow. Even though the stock is up about 38% from its 52-week low, AT&T is still surprisingly cheap. And free cash flow should rise even more in the coming years as AT&T completes this round of investment and cuts capital spending a bit.
AT&T's growth story revolves around wireless and fiber. In both areas, the company is performing well, despite a difficult macroeconomic environment.
In wireless, AT&T has consistently added at least 650,000 postpaid subscribers on a net basis in each quarter of 2022. Thanks to these subscribers, the company's wireless revenue grew 5.1% for the full year, and AT&T expects at least 4% growth in 2023.
In the fiber business, AT&T is growing its subscriber base fast enough to more than offset the continued decline in the traditional wireline portion of its business. Fiber revenues have already exceeded non-fiber revenues, and the number of fiber connections has exceeded the number of non-fiber connections. Fiber charges a higher monthly fee than non-fiber services, and the company still has plenty of room to expand its network and attract additional customers who have already passed through the fiber network.
While AT&T will certainly face obstacles down the road, especially since a global recession is very real this year or next, the company is in an excellent position to grow both its wireless and fiber business steadily over time. For investors looking for a solid stock with a good dividend on top of it, AT&T is a great option.
As long as the price is above 19.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 19.84
- Take Profit 1: 20.40
- Take Profit 2: 21.00
Alternative scenario:
If the level of 19.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 19.00
- Take Profit 1: 18.50
- Take Profit 2: 18.00
