The stock's 6.5% dividend yield comes with additional upside potential.
Telecom giant AT&T (T -1.37%) has seemingly hung around the $20 mark for years. Today, shares are trading hands at $17. The stock has underperformed the S&P 500 due to a bloated balance sheet and lack of earnings growth.
However, things could finally be looking up. AT&T is slimming down and focusing on what it does best: telecommunications. It also cut the dividend enough to free up cash to help pay down debt.
Is this enough to move the stock higher? Should investors buy the stock while it's under $20 per share? Here are three things you must know to decide.
1. AT&T is still a dividend machine
Most people buy AT&T stock for the dividend. Management's decision to slash the dividend in 2022 must have been tough, but it's proving to have been the right move. You can see below how much the smaller dividend has freed up AT&T's cash flow. The company's dividend payout ratio is now a healthy 40%, translating to $12 billion in cash left over after capital expenditures (investments into the business), interest expenses, and dividends.
T Cash Dividend Payout Ratio data by YCharts
Yep, that's discretionary cash profits that can go toward paying down debt (more on that in a minute) and eventually repurchasing shares to help drive earnings growth. The best part? AT&T is still a high yielder. Investors are getting a 6.5% starting dividend yield at the current share price.
2. The balance sheet is healing, albeit slowly
AT&T's most significant problem for years was the debt from its ill-fated DirecTV and Time Warner acquisitions -- nearly $200 billion from the Time Warner deal alone. So much debt created billions in interest expenses that suffocated profits.
The company got a hefty cash infusion from spinning off Time Warner in the spring of 2022 and has made further progress in deleveraging to just over 3 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). There is still work to be done, but annual interest expenses have already fallen nearly $2 billion from their 2019 peak of $8.4 billion.
T Total Long Term Debt (Quarterly) data by YCharts
Having billions of dollars in excess cash each year is an excellent sign that progress will be made. It's taken years to reach this point, but investors can finally be optimistic about AT&T's finances.
3. Customer acquisition could spark growth
AT&T is America's largest wireless carrier, which puts a target on its back for its primary competitors, Verizon Communicationsand T-Mobile. However, AT&T had a great 2023, picking up new customers. Post-paid phone subscribers grew by 1.7 million year over year in the fourth quarter, while fiber optic internet customers increased by 1.1 million. Adding customers is the best way AT&T can drive top- and bottom-line growth.
For 2024, AT&T guided wireless network revenue growth of at least 3% and broadband growth of at least 7%. This is promising and lays the path for earnings growth if management can continue paying down debt. Interest expenses take away from earnings, so every dollar saved on interest will flow to the bottom line.
Should investors buy under $20?
Today, at $17 per share, AT&T trades at a forward P/E of 7.5. That sets a low bar for solid investment returns when you factor in the stock's starting 6.5% dividend yield. Analysts believe earnings per share will grow roughly 3% annually over the next several years.
Still, 3% earnings growth plus that dividend is nearly 10% total returns annually. Long-term investors can collect the dividend while waiting for debt to go down. The eventual tailwinds of smaller interest payments should boost earnings, boosting investor sentiment, which should theoretically award a higher valuation to the stock.
Nothing is guaranteed, and this could take a few more years to play out. But if you're patient, the argument for buying AT&T at today's price is a solid one.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
FAQs
AT&T has 20.32% upside potential, based on the analysts' average price target. AT&T has a conensus rating of Strong Buy which is based on 9 buy ratings, 2 hold ratings and 0 sell ratings. The average price target for AT&T is $21.05.
What is the long term forecast for AT&T stock? ›
Highlights and Key Points: AT&T Stock Forecast 2024-2030
The AT&T stock price for today, 25.05. 2024 is $17.49. Most analysts predict AT&T stock will trade between $17 and $29 through 2024 as competitive pressures persist.
Is AT&T a good dividend stock? ›
AT&T Inc. (NYSE:T) has long been a favorite among income-seeking investors due to its attractive dividend yield. For those looking to generate passive income from their investments, AT&T's quarterly dividend of $0.2775 per share and 6.63% yield make it an enticing option.
What is the fair price for AT&T stock? ›
Stock Price Targets
| High | $25.00 |
|---|
| Median | $20.00 |
| Low | $12.00 |
| Average | $19.56 |
| Current Price | $17.47 |
At less than 9 times its trailing earnings, the stock is a cheap buy. Rival Verizon Communications trades at a multiple of 14. For value investors, AT&T's stock offers a good margin of safety. Should the markets struggle this year, AT&T could be a good stock to pile money into.
Is AT&T a good retirement stock? ›
Add it all up, and there's a good chance AT&T generates enough steady returns to help a long-term investor build wealth. The ability to retire a millionaire with AT&T's help will largely depend on factors like your initial investment, regular contributions, and the overall time horizon.
Where will AT&T stock be in 5 years? ›
AT&T stock price stood at $17.48
According to the latest long-term forecast, AT&T price will hit $20 by the end of 2025 and then $25 by the middle of 2027. AT&T will rise to $30 within the year of 2028, $35 in 2030, $40 in 2032 and $45 in 2035.
What is the AT&T stock price prediction for 2024? ›
According to our current T stock forecast, the value of AT&T shares will drop by -3.34% and reach $ 16.83 per share by May 28, 2024.
Is WBD a buy or sell? ›
Out of 13 analysts, 3 (23.08%) are recommending WBD as a Strong Buy, 3 (23.08%) are recommending WBD as a Buy, 6 (46.15%) are recommending WBD as a Hold, 1 (7.69%) are recommending WBD as a Sell, and 0 (0%) are recommending WBD as a Strong Sell.
Why should I invest in AT&T? ›
Analysts believe earnings per share will grow roughly 3% annually over the next several years. Still, 3% earnings growth plus that dividend is nearly 10% total returns annually. Long-term investors can collect the dividend while waiting for debt to go down.
If you are considering a dividend-focused strategy, you should carefully assess your income needs and risk tolerance. For example, if you require an income of 100,000 per year and were looking at a dividend yield of 10%, you would need to invest 1,000,000.
How often does AT&T pay a dividend? ›
AT&T Inc.'s ( T ) ex-dividend date is April 9, 2024 , which means that buyers purchasing shares on or after that date will not be eligible to receive the next dividend payment. AT&T Inc. ( T ) pays dividends on a quarterly basis.
Has AT&T ever had a stock split? ›
AT&T stock (symbol: T) underwent a total of 4 stock splits.
What happened to AT&T stock in 1984? ›
As a result of the AT&T Divestiture on Jan. 1, 1984 (the "Divestiture"), AT&T stockholders received one share in each of the seven regional bell operating companies for every 10 shares of AT&T owned on the record date of Dec.
How to invest in AT&T stock? ›
How to buy AT&T stock on Public
- Sign up for a brokerage account on Public. It's easy to get started.
- Add funds to your Public account. ...
- Choose how much you'd like to invest in AT&T stock. ...
- Manage your investments in one place.
Verizon's superior FCF puts it in a stronger position than AT&T to continue reducing debt and maintain its dividend. Verizon's FCF increase is thanks in part to growth in its wireless-service sales, which hit $76.7 billion in 2023, a year-over-year increase of 3.2%.
Why is AT&T a strong buy? ›
Reasons to buy AT&T now
Shares of AT&T offer an eye-popping 6.7% yield at recent prices. It also looks like the quarterly dividend is well-supported by rising profits. Over the past year, AT&T needed less than two-fifths of the free cash flow its operations generated to meet its dividend obligation.
Why is ATT stock price dropping? ›
AT&T reported fiscal fourth-quarter earnings below Wall Street expectations, but revenue came in above the consensus and the company added more customers than had been forecast.
