AT&T Is Looking Good After a Few Disastrous Years
AT&T (NYSE:T) is close to completing a year-long transformation. Now focusing on its core business model, AT&T consolidated operations and streamlined its workflow by removing its entertainment division. After this much-needed course correction, AT&T is in a prime position to succeed in my view, with its dividend as ever at the core of its proposition to investors.
The markets are not biting, but it's not just AT&T. Due to consistent interest rate hikes, inflation, supply chain issues, Russia's invasion of Ukraine and other supply chain issues, many companies are struggling. The future will depend on which players can outperform peers in a difficult environment.
AT&T operates in a highly competitive, saturated industry. Investors need not expect massive growth. However, that is not the point for AT&T. The company is not known for its growth. Instead, investors are mostly interested in the company because of its high dividend. AT&T provides a dividend yield of more than 7%. This is one of the highest in the market. Now that AT&T is concentrating on its legacy businesses, it can refocus on what it does best: operating a steady, sustainable business and sharing most of its profits with shareholders.
AT&T did a lot right this year
AT&T is usually considered a low-risk investment. The company has been around for well over a century and is one of the world's largest multinational telecommunications companies. It has its hand in wireless, broadband, television and landline services.
AT&T also pays an attractive dividend, which gives investors some downside protection. While AT&T is not immune to economic downturns, it is typically less affected than other companies due to its size and diversification.
The company has had some rough years recently, but it is making a comeback after dabbling in entertainment. It spent billions on its deals to acquire DIRECTV and Warner Media assets, raising enormous debt. Before selling off any of its assets, by the end of 2020, AT&T racked up a total debt of $157.3 billion.
However, management deserves credit for changing course and getting back to what it does best when that didn't work out as expected. AT&T is the best when it comes to telecommunications. The company has a long history of innovation and continues to lead the way in terms of technology and customer service. AT&T has consistently been ranked as one of the top wireless service providers, and its network is reliable and fast. Its foray into entertainment is over, and it can finally concentrate on what it does best again.
And in the end, it is getting what we all want. AT&T has been able to grow its customer base by over 813,000 postpaid phone customers in the second quarter versus last year, and it's largely because of its impressive network performance. These numbers are among the strongest for the second quarter in more than 10 years. Meanwhile, T-Mobile (NASDAQ:TMUS) alsoshowed off good numbers with 723,000 net postpaid phone additions.
Based on the latest quarterly results, there has also been a small yet steady decrease in postpaid phone churn, 0.75% versus 0.69% in the year-ago quarter. Due to these excellent results, AT&T reiterated its guidance for free cash flow in the $20 billion range in 2023 and is looking at raising wireless revenue guidance for 2022 from 3%+ growth to 4.5% to 5% growth.
AT&T will remain a perennial favorite for income investors
The recent moves from AT&T are positive. They will repose confidence in the company and put the enterprise in a great position for the rest of the year. However, AT&T has remained an investor's delight for the longest time due to its dividend.
The dividend is the primary reason why investors are attracted to AT&T. The company pays a quarterly dividend of 27.75 cents, which is much higher than the rest of its peers. The dividend is a pretty important part of the company's strategy, and it can afford to pay the high dividend because of healthy free cash flow, which will only grow from here.
The company is in the middle of a three-year capital investment plan that runs through 2025. It has completed a significant portion of the investment plan and can now look forward to more free cash flow. In addition, its debt load is the lowest that it has been since 2017. All of these factors will help in shielding the dividend. This is very important from AT&T's point of view.
This company was a Dividend Aristocrat until last year, meaning it increased its dividends for over 25 consecutive years, but unfortunately it did break its streak recently. Before the WarnerMedia split, the telecom giant paid its shareholders $2.08 per share. However, now it's down to $1.11 per share. This is one of the major reasons why shares are trading at such an attractive valuation these days. But, moving forward, AT&T will make up lost ground since the dividend yield stands at a more manageable 7%.
Takeaway
AT&T's disastrous foray into entertainment is over, and now the company can move forward and reward investors. The company has slashed its debt, sold off non-core assets and refocused its business on core strengths.
AT&T is now a leaner, meaner machine that is ready to compete in the 5G era. AT&T's 5G network is second to none, and the company is poised to reap the rewards of being a first mover in this new technology paradigm. AT&T's stock is attractively valued, and the company's dividend yield is among the highest in the market. For income investors seeking stability and downside protection, few companies come close to AT&T.
This article first appeared on GuruFocus.
