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Long-term shareholders in AT&T (NYSE: T) don’t have much to be happy about. Against the backdrop of the S&P 500 index’s 166% rally over the last decade, the telecom company’s share price has fallen by roughly 44%. The stock is also down 20.5% this year alone.

Is AT&T a smart buy now considering its big dividend yield and meager price-to-earnings ratio, or is it a value trap destined to serve up even more disappointment for shareholders? Two Motley Fool contributors have vastly different takes on where this telecom stock is headed.

Bull case: Valuation and yield leave room for strong returns

Keith Noonan: No doubt about it, AT&T has its share of problems. The company still has a huge amount of debt on its books, its history of acquisitions is littered with duds, and its sales and earnings growth will likely proceed at slow paces even in optimistic scenarios due to the competitive environments of the categories it operates in.

At the same time, the company is more streamlined after a series of divestitures, it continues to serve up plenty of free cash flow, and it looks cheaply valued. Trading at roughly 6 times this year’s expected earnings and sporting a 7.6% dividend yield at the current share price, AT&T offers significant upside potential even in the face of relatively sluggish business performance.

T PE Ratio (Forward) data by YCharts.

While the company’s revenues rose just 0.9% year over year in the second quarter due to continued declines for the wireline phone business and other headwinds, its most important business pillars continued to show solid momentum. AT&T added 326,000 net postpaid phone accounts in the period. Meanwhile, it added 241,000 net fiber customers — making Q2 its 14th consecutive quarter of net adds coming in above 200,000.

With AT&T guiding for at least $16 billion in free cash flow (FCF) this year, the company should generate enough FCF to fund its dividend distribution nearly twice over. The payout looks soundly sustainable at this point, and current levels of FCF generation and additional cost-cutting initiatives should help the company continue to reduce its debt load.

The telecom giant has managed to cut its net debt by roughly $20 billion over the last three years while still investing roughly $100 billion in infrastructure, and it expects to be able to cut its debt balance by another $4 billion by the end of this year. With some infrastructure expenses and one-time items out of the way, management also anticipates that more FCF will be freed up, and that its debt reduction process should accelerate through the first half of 2025.

AT&T certainly has its warts, but its current valuation and returned-income component present an attractive risk-reward proposition for investors.

Bear case: It’s still a yield trap

Jeremy Bowman: I can’t think of a company that has mismanaged shareholder capital worse than AT&T in the last decade. It executed two of the worst mergers in modern history, buying declining satellite TV business DirecTV for $67 billion including debt in 2015. Then in 2018, it paid $85 billion for Time Warner, a company that is now part of Warner Bros. Discovery, which has a market cap of less than $30 billion and in which AT&T retains a sizable stake.

Those deals are in the past, but they’ve left the company swimming in debt to the tune of $143 billion as of the end of the second quarter.

Management has pledged to focus on the core telecom sector and avoid any more media plays, but AT&T is still led by management that was responsible for the disastrous Time Warner acquisition, as current CEO John Stankey was in charge of integrating Time Warner at the time as COO.

Additionally, the company faces plenty of challenges that are outside of its control. It could be on the hook for billions of dollars in liabilities resulting from old lead-sheathed telephone cables that are polluting the ground and the water supplies in communities across the country. The industry also seems to be running out of growth as AT&T’s revenue increased by just 0.9% in its most recent quarter, and revenues from mobility service — its core growth segment — were up just 4.9%.

As a reflection of the challenges in the industry, T-Mobile, which has outperformed AT&T and Verizon in recent years, just announced layoffs, showing that generating profits in the industry is becoming more difficult.

Yes, AT&T stock is cheap, and it has a high 7.6% dividend yield, but the stock has been dead money for years, even with its payouts. With little growth available in its industry and a long history of unforced management errors, AT&T is a stock best avoided. Income investors can find better dividend stocks elsewhere.

Is AT&T a smart buy right now?

Due to fierce competition in the telecom industry, a history of underwhelming execution, and a hefty debt load, AT&T stock isn’t as low-risk an investment as its modest price-to-earnings ratios and seemingly sustainable dividend might imply. If you have concerns that management will continue to fumble opportunities and continue to disappoint amid a challenging industry backdrop, other high-yield dividend stocks would likely be better fits for your portfolio.

On the other hand, a sustained stretch of sell-offs has pushed the company’s valuation and yield to levels that may be enticing to some income-focused investors. AT&T faces some significant challenges ahead, but its healthy free-cash-flow generation leaves the door open for its beaten-down stock to rebound and deliver strong returns.

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Jeremy Bowman has no position in any of the stocks mentioned. Keith Noonan has positions in AT&T and Warner Bros. Discovery. The Motley Fool has positions in and recommends Warner Bros. Discovery. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

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