After several years in the doghouse for many investors, AT&T (T) is firing on all cylinders and back to its winning ways. I previously highlighted AT&T as a contrarian bet at the beginning of 2024, when the stock was trading at $17.31, and the stock has performed well since then, gaining over 35%. I remain bullish on the telecom giant based on its more focused and streamlined approach to the business, its commitment to returning capital to shareholders, its attractive 4.9% dividend yield, and its undemanding valuation.
For years, AT&T was known as a dividend stalwart, and many investors relied on the Dividend Aristocrat for reliable dividend income each quarter. AT&T hurt its reputation with many of these investors when it lowered its dividend in 2022 amidst the spinoff of Warner Brothers, which merged with Discovery to become Warner Bro Discovery (WBD). However, the move to spin off Warner Brothers looks like the right decision in hindsight, as the stock has languished amidst a series of struggles.
Meanwhile, AT&T is quietly getting back in the good graces of dividend investors. The stock yields an attractive 4.9%, well above the market average and above that of treasury bonds at a time when interest rates are likely to continue decreasing. Plus, 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 outlined its multi-year strategic vision at its Analyst & 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 dividend payments and $20 billion worth of share buybacks. This includes an initial share buyback authorization to purchase back $10 billion worth of shares before the end of 2026. Share buybacks are accretive to investors as they reduce the number of shares outstanding (thus increasing earnings per share) and can be a signal that management views shares as undervalued. Buybacks can be especially accretive for stocks that pay a large dividend because each share bought back is a share they no longer have to pay out the dividend on.
AT&T’s Investor Day re-established the fact that AT&T is prioritizing returns to shareholders, and it was also a good reminder that this is a more streamlined business than it was just a few years ago. The moves 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 has moved on from them by divesting Warner Brothers via the aforementioned 2022 spinoff and by recently exiting DirectTV by selling its remaining 70% stake in the business to TPG, a transaction expected to be completed in 2025. These divestitures from ancillary businesses helped AT&T to reduce its debt by $25 billion. They also enable AT&T to focus on its bread and butter. As AT&T said at the time of the DirectTV sale, “This sale allows AT&T to continue to focus on being the leading wireless 5G and fiber connectivity company in America.”
AT&T says its goal is to have 50 million fiber locations by 2029 and to finish the modernization of its 5G network by 2027. AT&T says that investing in fiber and its 5G network has produced strong returns for the business as it has netted about 10 million additional cell service subscribers since mid-2020 while growing annual Mobility Services revenues by $9 billion annually during this time. Meanwhile, it has nearly doubled revenue from fiber customers over the last three years.
Shares of AT&T are up about 40% over the past year. But the good news for investors is that even after this massive run, shares are still incredibly cheap.
In fact, shares trade for just 10.7 times 2025 consensus earnings estimates. This is less than half the valuation of the broader market; the S&P 500 (SPX) trades for over 25 times earnings. Stocks with lower valuations like this can be more defensive, an appealing feature at a time when the S&P 500 is trading at all-time highs and well above historical valuations. Plus, this undemanding multiple leaves plenty of room for upside ahead if AT&T keeps executing.
Turning to Wall Street, T earns a Moderate Buy consensus rating based on nine Buys, four Holds, and zero Sell ratings assigned in the past three months. The average AT&T stock price target of $24.15 implies 1.3% upside potential 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 under 11 times forward earnings or less than half the market multiple. At a time when the S&P 500 has reached unprecedented heights, it is not a bad idea for investors to have a few cheaper, defensive names in their portfolios.
I’m also bullish on shares based on the attractive 4.9% dividend yield and management’s intense focus on returning capital to shareholders through a combination of share buybacks and dividend payments worth $40 billion over the next three years. While the company has made some missteps in the past, the current management has righted many of these wrongs, laid out a well-articulated vision, and is focused on streamlining the business and rewarding shareholders, making AT&T a strong buy in my book.
