Source: PaxForex Premium Analytics Portal, Fundamental Insight
The stock price of AT&T has been declining for the past decade, leading many investors to perceive it as a cheap stock. However, investors should not solely focus on price, but also on the value they can receive from the stock. Despite the decline, AT&T still offers a substantial dividend yield of 6.5%, providing a solid foundation for investment returns.
The question remains whether AT&T's business can generate the growth needed to improve the stock price. To answer this question, here's what you should know.
The decline in AT&T's stock price over the years is a reflection of the company's pursuit of a shift into media content, which ultimately proved to be unsuccessful and a waste of shareholder money. The company's bloated books with debt have also contributed to its struggles.
However, the company has taken steps to address these issues, including spinning off its remaining media segment and reducing its debt. The company's balance sheet has improved significantly, although there is still work to be done.
The significant advantage of reducing debt is the substantial interest payments that AT&T owes each year. In the past year alone, the company has paid more than $6 billion in interest, which accounts for almost 10% of its gross profit. By paying down its debt, AT&T can redirect more of that $6 billion toward increasing its earnings per share (EPS).
While there's always a risk that AT&T's stock could continue to decline, its current valuation may provide a level of support for the share price. With a price-to-earnings ratio (P/E) of only 7, compared to the S&P 500's P/E of 18, the stock appears undervalued.
However, analysts project that AT&T's earnings per share (EPS) will only grow at an average annual rate of 3.3% over the next three to five years, which is significantly lower than the S&P 500's historical average of 10% growth. As such, the stock's discount to the broader market may be justified.
As AT&T continues to pay off debt and improve its financial health, investor sentiment may improve. Despite past setbacks, the company has continued to grow its customer base, particularly in the wireless segment, which is its core business. Even with modest earnings growth and a stable valuation, the stock could provide a solid return for investors, especially considering its 6.5% dividend yield. A scenario of meeting analyst growth estimates and a stagnant valuation could result in almost 10% annual returns. This is a realistic possibility and could potentially lead to additional gains if the market begins to value the stock more favorably.
Despite the potential for solid returns, investing in AT&T is not without risk. In Q1 of this year, the company reported a significant drop in free cash flow, down to just $1 billion from $2.8 billion in the previous year. This is not enough to cover the roughly $2 billion quarterly dividend, raising concerns among investors.
However, AT&T's management has attributed the drop to seasonality and reaffirmed its full-year guidance of at least $16 billion in free cash flow. Investors should closely monitor the company's cash flow in the coming quarters to ensure that it meets its guidance.
Assuming that AT&T is able to hit its cash flow targets, the stock could provide solid returns, potentially around 10% annually, with the potential for more. Nevertheless, investors should be aware of the risks associated with investing in the company.
While the price is below 17.70, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 16.59
- Take Profit 1: 16.00
- Take Profit 2: 15.00
Alternative scenario:
If level 17.70 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 17.70
- Take Profit 1: 18.70
- Take Profit 2: 19.50
