To The Moon

$AT&T Inc(T)$

AT&T stock provides passive income, offering investors a dividend yield of approximately 4.2%. But does that make it a buy? Not necessarily. Dividend investors should consider more than just yield, as stock price fluctuations can outweigh dividend returns.

In this article, I’ll evaluate AT&T using broader financial metrics beyond its dividend yield. While the yield is important, I’ll also analyze the company’s revenue growth, profit margins, return on invested capital, and valuation. Specifically, I’ll assess its forward price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios. Additionally, I’ll share my proprietary discounted cash flow (DCF) model to determine AT&T’s fair value and conclude whether it’s a buy at current levels.

Earning Overview

Fundamental Analysis

Profitability and Debt Considerations

AT&T’s operating margin has improved over the last decade, reaching 19.72% over the trailing 12 months. This increase is partly due to the company shedding underperforming businesses and benefiting from strategic investments in 5G technology. A strong 20% operating margin provides AT&T with cash flow to help pay down its significant debt burden.

However, AT&T remains one of the most heavily indebted companies in the world, with over $123 billion in long-term debt. Managing this debt load effectively will be critical to the company’s financial stability and future performance.

AT&T’s Revenue Growth Trends

Over the past decade, AT&T’s revenue growth has been inconsistent, partly due to acquisitions and divestitures. Operating in a mature industry with limited expansion opportunities, the company’s growth will rely on incremental revenue streams, such as adding more devices to existing wireless plans or increasing monthly data plan prices. Given AT&T’s market environment, significant subscriber growth is unlikely, meaning investors should expect modest low- to mid-single-digit revenue growth over the next decade.

Dividend Yield

In 2024, AT&T’s dividend yield was significantly higher, at times approaching 7%. However, the yield has since declined, largely due to an increase in the stock price. Since dividend yield is calculated by dividing the annual dividend per share by the stock price, a higher stock price results in a lower yield. Despite this, AT&T’s current 4.16% dividend yield remains one of the more attractive options in the market.

Guidance

Given AT&T's strong cash flow generation and key investments in fiber and 5G, there is potential for moderate growth, but the stock may be overvalued at current prices, particularly when considering the high debt and competitive pressures. The stock is best seen as a hold for now, especially for income-focused investors who are attracted by the dividend yield but should be cautious about the broader risks in the telecom industry.

Investors should watch for further updates on debt reduction, subscriber growth, and the performance of AT&T’s 5G initiatives to gauge the company’s future prospects.

Free Cash Flow

AT&T generates enough cash flow to meet its debt obligations. However, as an investor, you’d typically prefer a company to carry less debt. That said, if any company were to have a large debt load, it should be one with strong recurring cash flow—like AT&T.

The reason AT&T’s cash flow is reliable is that consumers are unlikely to cancel their wireless plans, even during economic downturns. In a severe recession, cutting a data plan is not a common cost-saving measure, as mobile connectivity is essential for communication, job opportunities, and staying in touch with family and friends. With most households now relying solely on mobile phones rather than landlines, wireless plans remain a necessary expense, representing only a small portion of overall household budgets.

Risks and Challenges

High Debt Load

AT&T has a significant amount of debt—over $123 billion in long-term liabilities. This high debt burden limits the company’s financial flexibility and forces it to allocate a large portion of its cash flow toward servicing its debt. If AT&T's cash flow were to decrease or if interest rates rise, managing this debt could become more challenging.

Competition

The telecommunications industry is highly competitive, with AT&T facing pressure from rivals like Verizon and T-Mobile. This competition is not just limited to pricing but also extends to network coverage, service offerings, and technology investments (e.g., 5G). AT&T will need to continually innovate to maintain its market share and profitability in this competitive environment.

Declining Traditional Media Business

AT&T has made significant moves to divest its media assets (such as the sale of WarnerMedia and DirecTV). While this streamlines the company’s focus on core telecommunications operations, it also means that AT&T has lost important revenue streams. Without these, AT&T must rely more heavily on its wireless and broadband businesses to drive growth, which could be challenging in a saturated market.

Slow Revenue Growth

AT&T operates in a mature industry, and the U.S. wireless market is nearing saturation. This means AT&T may struggle to find new sources of significant revenue growth. Its growth will likely need to come from increasing average revenue per user (ARPU) or selling additional services like 5G plans or smart home devices, which may not be enough to drive substantial growth over the long term.

Technological Disruptions

The telecom industry is rapidly evolving with the advent of new technologies, including 5G, fiber optics, and the rise of wireless broadband. While AT&T is investing in these areas, there is always the risk that newer technologies or more nimble competitors could outpace AT&T’s advancements.

AT&T (T) operates in a mature and highly competitive industry with limited growth prospects, but it may not necessarily be classified as a "declining" business. Instead, it's a slow-growth business facing several challenges:

Why AT&T Faces Growth Challenges

Limited Subscriber Growth – The U.S. wireless market is saturated, with most consumers already owning a mobile plan. AT&T's ability to gain new customers is limited, meaning revenue growth must come from price increases or bundling additional services.

Declining Legacy Businesses – AT&T has divested several underperforming assets, including its media business (WarnerMedia) and satellite TV (DirecTV). While this helps streamline operations, it also reduces revenue streams.

Heavy Debt Load – AT&T has over $123 billion in long-term debt, which limits financial flexibility and forces the company to allocate significant cash flow toward debt repayment rather than growth investments.

Competitive Pressure – The telecom industry is dominated by aggressive pricing wars among AT&T, Verizon, and T-Mobile. AT&T struggles to differentiate itself meaningfully in a price-sensitive market.

Low Return on Capital – AT&T’s Return on Invested Capital (ROIC) is below its Weighted Average Cost of Capital (WACC), meaning it's not generating strong returns on its investments. This is a sign of inefficiency and limited profitability improvement.

Valuation

Target Price: AT&T’s stock is currently trading above some analysts' target prices, indicating that the stock may be overvalued at its current levels, especially when looking at valuation metrics such as price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios. Some analysts have set a target price of $22-$24 per share, which is lower than its current price of around $26.60.

Despite its stable cash flow, AT&T’s return on invested capital (ROIC) is weak, sitting at just 4.37%—well below its weighted average cost of capital (WACC), which I calculated at 7.85%. This is a red flag, as it suggests AT&T is not generating sufficient returns to justify its cost of capital.

Using my proprietary discounted cash flow (DCF) valuation model, I estimate AT&T’s intrinsic value at $21 per share, significantly lower than its current trading price of $26.60. This indicates the stock may be overvalued. Additionally, AT&T’s price-to-free-cash-flow (P/FCF) and price-to-earnings (P/E) ratios stand at 10.39 and 11.85, respectively—among the highest levels seen in recent years. Historically, AT&T has not traded at such high valuation multiples, largely due to its low growth prospects, weak returns on capital, and substantial debt burden.

Market sentiment

AT&T's stock has experienced a significant surge, increasing by approximately 60.5% over the past year, outperforming the S&P 500. This performance has led to a notable shift in market sentiment.​ Despite this positive momentum, investor sentiment remains mixed. Analyst recommendations are divided, with nine advising a 'buy,' eight suggesting 'hold,' and one recommending 'sell.' Additionally, TipRanks reports that 2.7% of retail investors have adjusted their holdings in AT&T over the past seven days, indicating a cautious approach among individual investors. AT&T's strategic focus on its core telecommunications business, coupled with substantial investments in fiber-optic infrastructure, has contributed to improved cash flow and customer satisfaction. However, the company's substantial debt load and the competitive landscape of the telecom industry continue to be areas of concern for investors.​

Conclusion

Does This Mean AT&T is a Declining Business? Not necessarily. While it lacks strong growth potential, AT&T remains financially stable due to its recurring revenue base from wireless subscriptions. Even in economic downturns, consumers are unlikely to cancel their phone plans, ensuring steady cash flow.

However, if AT&T cannot improve efficiency, reduce debt, and drive innovation, it risks becoming a true declining business over time. The stock’s weak growth and high debt levels already make it less attractive for long-term investors seeking capital appreciation.

Given all these factors, I would not consider AT&T stock a buy for dividend investors at current prices. Instead, I would rate it as a hold.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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