Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
AT&T (T 0.22%) has begun a new chapter. The sale of DirecTV and the spinoff of its Warner Media assets into Warner Bros. Discovery put the telecom giant on a more stable footing financially and allowed it to focus exclusively on 5G.
Although that focus should improve its ability to compete with Verizon and T-Mobile, it continues to face significant challenges. For this reason, investors and those interested in becoming AT&T investors need a firm grasp of AT&T’s bull and bear cases before making a decision.
In many ways, AT&T has positioned itself well. For all the focus on its television and media ventures, AT&T maintains a strong presence in the wireless space.
AT&T claimed about 33% of the wireless market as recently as five years ago. However, it made strides when it began offering unlimited plans in earnest. Its market share gains have taken that share to about 45%, making it the industry leader.
Sources: Strategy Analytics, Fierce Wireless, Statista estimates, AT&T, Verizon, T-Mobile, Sprint, US Cellular. Chart by author.
Moreover, due to the high cost of building nationwide wireless networks, it will likely not face major competition except from Verizon and T-Mobile. Given the importance of wireless service in today’s world, it should maintain that customer base as long as it keeps up technologically. And since investors can buy that reliable revenue stream for around 7 times earnings, that likely adds to the stock’s attractiveness.
That low valuation will buy investors $1.11 per share in annual dividend income. At current prices, that will give shareholders a yield of just above 6%. That is more than three times the S&P 500‘s current yield, which stands at about 1.82%. That dividend cost the company about $7.8 billion over the first nine months of 2022. But with $8 billion in free cash flow for that period, AT&T can afford that payout.
Unfortunately, the dividend is just as much of a bear case for AT&T. In addition to free cash flows barely covering the payout, investors are still reeling from the dividend cut that cost it its 35-year streak of annual dividend increases. This stands in contrast to Verizon, which offers a 7% yield and a 16-year streak of annual payout hikes.
Investors should also remember that dividend stocks like AT&T have no obligation to pay dividends. With the built-in expectation of payout hikes gone, AT&T could slash or eliminate the payout.
That is not a far-fetched scenario. The $40 billion payment from the Warner Bros. Discovery spinoff helped reduce debt. Still, the total debt stands at more than $133 billion. That is a heavy burden given the company’s book value — the value after subtracting liabilities from assets — of about $140 billion. And given the rise in interest rates, refinancing that debt over time at higher rates will add to its burden.
Dividends and debt are only some of AT&T’s financial worries. Building and maintaining wireless networks is costly. Capital expenditures cost AT&T more than $15 billion in the first three quarters of 2022, 28% more than the same period last year.
Additionally, T-Mobile, which once competed mostly on price, has made quality improvements to its network in the 5G era. That threat will likely limit revenue growth and could force higher CapEx spending to maintain its market share lead.
Investors should probably avoid AT&T stock. Admittedly, its valuation is low, and its competitive position in the wireless market should keep the company relatively stable.
However, AT&T is more likely to cut its dividend than Verizon, making it a risky proposition for income and giving Verizon an edge among high-dividend stocks. Moreover, heavy debt loads and rising competition will limit revenue growth and keep costs high. Such conditions will probably rob AT&T of any catalyst that might take the stock higher.
Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US, Verizon Communications, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite.
