After several years in the doghouse of many investors, AT&T (T) is firing on all cylinders and getting back on its winning path. I previously highlighted AT&T as a contrarian bet in early 2024, when the stock was trading at $17.31, and the stock has performed well since, gaining more than 35%. I remain bullish on the telecom giant due to its more focused and streamlined approach to business, commitment to returning capital to shareholders, attractive 4.9% dividend yield and valuation undemanding.
For years, AT&T was known as a dividend stalwart, and many investors relied on Dividend Aristocrat for reliable dividend income each quarter. AT&T damaged its reputation with many of these investors by cutting its 2022 dividend amid the Warner Broth spinoff.ers, which merged with Discovery to become Warner Bro Discovery (WBD). However, the decision to split up Warner Brothers seems like the right decision in hindsight, as the title languished amid a series of difficulties.
Meanwhile, AT&T is quietly getting back into the good graces of dividend investors. The stock gives an attractive yield of 4.9%well above the market average and above that of Treasury bonds at a time when interest rates are expected to continue to fall. Additionally, after the 2022 cut, AT&T's dividend looks safe and secure, with a dividend coverage ratio of just under 50%. This week, AT&T presented its multi-year strategic vision at its analyst and investor day, laying out plans to return $40 billion to shareholders over the next three years.
This will be done through a combination of $20 billion in dividends and $20 billion in share buybacks. This includes an initial share repurchase authorization to repurchase $10 billion worth of stock before the end of 2026. Stock repurchases are accretive to investors because they reduce the number of shares outstanding (thus increasing the earnings per share) and may be a signal that management believes shares to be undervalued. Buybacks can be particularly accretive for stocks that pay a large dividend, because each share bought back is a stock on which they no longer have to pay a dividend.
AT&T Investor Day reinstated the fact that AT&T prioritizes shareholder returns, and also served as a reminder that it is a more streamlined business than it was a few years ago barely years. Attempts to foray into the entertainment business by purchasing DirectTV in 2015 and Time Warner in 2018 can only be described as major missteps.
But the good news is that management recognized these mistakes and turned the page by divesting Warner Brothers via the aforementioned 2022 spinoff and recently exiting DirectTV by selling its remaining 70% stake in the company to TPG, a transaction expected to be completed in 2022. 2025. These divestitures of ancillary businesses helped AT&T reduce its debt by $25 billion. They also allow AT&T to focus on its daily bread. As AT&T said at the time of the DirectTV sale: “This sale allows AT&T to continue to focus on its position as the leader in wireless.” 5G 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 investing in fiber and its 5G network has produced strong returns on investment for the company since it generated around 10 million additional euros. cellular service subscribers since mid-2020 while increasing annual mobility services income of $9 billion per year during this period. At the same time, it has almost doubled its revenue from fiber optic customers over the past three years.
AT&T shares are up about 40% over the past year. But the good news for investors is that even after this massive rally, stocks remain incredibly cheap.
In fact, shares are trading at just 10.7 times consensus earnings estimates for 2025. That's less than half the valuation of the market as a whole; the S&P 500 (SPX) trades at more than 25 times earnings. Stocks with lower valuations like this can be more defensive, an attractive trait at a time when the S&P 500 is trading at all-time highs and well above historic valuations. Plus, this undemanding multiple leaves plenty of room for upside if AT&T continues to execute.
As for Wall Street, T earns a Moderate Buy consensus rating based on nine Buy, four Hold, and no Sell ratings assigned over the past three months. THE AT&T stock average price target of $24.15 implies a potential upside of 1.3% from current levels.
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 due to the attractive 4.9% dividend yield and management's intense focus on returning capital to shareholders through a combination of share repurchases and dividend payments worth $40 billion over the next three years. Although the company has made some missteps in the past, current management has righted many of those wrongs, presented a well-articulated vision, and is focused on streamlining the business and rewarding shareholders, making it 'AT&T a solid buy in my opinion.
