An investment in AT&T (NYSE: T) stock looks appealing on the surface right now given its hefty dividend yield of around 7%. However, the telecom giant’s substantial long-term debt load of $126.7 billion has some wondering if the dividend will get cut to help pay down those financial obligations. Management has tried to reassure investors, with CEO John Stankey stating, “We remain committed to our dividend payout level and expect its credit quality to consistently improve.”
Stankey took over the top spot in the summer of 2020 and spent the last few years guiding AT&T through a significant transformation. He led the organization through a global pandemic. He also transitioned AT&T away from an entertainment empire that his predecessor spent billions of dollars building. The divestiture of those entertainment assets was completed last year.
Now that the company has returned to a pure telecommunications focus, is AT&T a good investment for the long haul? Let’s dig into the company’s current state to answer that question.
AT&T’s transition away from show business was a much-needed move to conserve money and resources. After all, building a 5G wireless network required AT&T to invest billions of dollars. With the company back to its telecom roots, AT&T looks well-positioned to maintain its leadership as the largest U.S. telecom carrier based on wireless subscriptions.
Under Stankey, AT&T accrued an impressive streak of 13 consecutive quarters of net growth in its valuable postpaid phone subscriptions. Not only is the telecom titan successfully growing its wireless phone customers, but it’s also holding onto them. The company’s postpaid phone subscriber churn, which represents the percentage of customers who leave AT&T, sits at historically low levels. In fact, customers who opted for both AT&T’s mobile phone service and fiber optic internet exhibited the lowest churn and the highest customer lifetime value.
That’s just one of the reasons why building out fiber optic internet is a key strategy for AT&T. Another boon is that wherever the company has made fiber available, it experienced an increase in the adoption of wireless mobile services as well.
AT&T’s fiber business is experiencing strong adoption. The third quarter marked the company’s 15th consecutive quarter of more than 200,000 net new fiber customers.
Consequently, Q3 fiber revenue grew nearly 27% year over year. This resulted in AT&T’s consumer broadband revenue reaching $2.7 billion, its highest total under Mr. Stankey’s tenure.
To accelerate its fiber expansion, AT&T formed a joint venture with BlackRock this year. The company is also leveraging its growing 5G network to deliver internet access wirelessly in less densely populated areas. Customers can sign up and self-install this option in minutes, which should help accelerate the growth of AT&T’s broadband business.
This brings us to AT&T’s core mobile business, which accounted for $20.7 billion of the company’s $30.4 billion in Q3 sales. This business is doing well as Q3 wireless service revenue rose nearly 4% from 2022, contributing $15.9 billion.
Moreover, AT&T expects a revenue tailwind from the growing adoption of electric vehicles since EVs use wireless bandwidth for features such as software updates. AT&T provides wireless services to several car manufacturers, including Tesla and Ford Motor Company.
With AT&T seeing revenue and customer growth and expenditures related to the buildout of its 5G network winding down in the months ahead, the company expects free cash flow (FCF) to improve over time, providing the ability to reduce debt while still funding its dividend. In fact, AT&T estimates 2023 FCF to come in at $16.5 billion, a substantial increase over last year’s $14.1 billion.
Also, more than 95% of AT&T’s long-term debt is set at a fixed interest rate. So, the federal rate hikes over the past year haven’t been an issue for the telecom giant.
Actually, thanks to the rising interest rate, AT&T earns more interest on its billions in cash than the cost of debt. In addition, the company is on track to reduce its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio to the 2.5 times range in the first half of 2025, which brings its debt load to a manageable level.
So, although AT&T is still dealing with the debt from its entertainment acquisitions, the company is heading in the right direction. Its success in growing its fiber and mobile businesses is helping AT&T generate dependable free cash flow, and these factors point to AT&T’s financials improving over the long term. This makes AT&T a reliable income stock.
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Robert Izquierdo has positions in AT&T, BlackRock, Ford Motor Company, and Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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