After years of turmoil, AT&T has been making strides to return to its roots — and it seems to be paying off.
With all the noise surrounding artificial intelligence (AI) and the attention it has brought to the “Magnificent Seven” and growth stocks, a number of value and dividend stocks have flown under the radar. One company in particular that hasn’t gotten much attention is AT&T (T 0.65%).
So far in 2024, AT&T has had one of its best years in recent times. It’s outperforming all three major indexes, something we haven’t been able to say for quite a while. It’s not mildly outperforming them, either; there’s some considerable distance between their returns.
T Total Return Level data by YCharts
With its total returns up over 30% this year, some are wondering if they’ve missed the chance to get in on AT&T’s rally. The short answer is that nobody knows. The longer answer is that if you’re a long-term investor interested in above-average dividend income, AT&T stock could serve you well.
The benefits of dropping dead weight
AT&T’s past five years or so had been pretty rough, up until this year. In 2018, it paid $85 billion to acquire Time Warner (renamed WarnerMedia) with hopes of entering the media and entertainment business. Time Warner had the content, and AT&T had the distribution network (phones and broadband).
The Time Warner deal was massive, and a lot had to go right for it to work in AT&T’s favor. Unfortunately, a lot went wrong, and the move will probably go down as one of the most regrettable in AT&T’s long history. All it led to was a $43 billion WarnerMedia spin-off in 2022 and lots of debt to deal with as a result.
After dropping its media and entertainment ambitions and returning to its core telecom business, AT&T has been able to refocus its resources to where AT&T truly thrives.
It’s always been about the dividend
Regardless of its recent market-beating run, most people invest in AT&T for its dividend. Even after slashing its dividend by almost half in 2022, it has had one of the more attractive dividends in the S&P 500. Its forward yield is close to 5.4%. Assuming it holds steady, a 5.4% yield could net investors $54 annually per $1,000 invested.
AT&T’s lucrative dividend hasn’t come without questions, with many spending the past couple of years wondering if it was sustainable, given the company’s high debt and capital expenditure requirements. With a turnaround in AT&T’s finances, the answer seems to be yes. Take away the spike and plunge around 2021 and 2022, and its current payout ratio is on par with what it has been over the past decade.
T Payout Ratio data by YCharts
For a mature telecom company like AT&T, a 64% payout is par for the course and sustainable. Maybe more noteworthy, though, is the growth of AT&T’s free cash flow, which gives it the funds to pay its dividend and reduce its debt.
In the second quarter (Q2), AT&T’s free cash flow was $4.6 billion, up from $4.2 billion in Q2 2023. Management predicts its 2024 free cash flow will be between $17 billion and $18 billion, more than enough to cover its dividend and debt obligations.
Focusing on the next phase of the business
AT&T has spent much of the past few years building out and expanding the infrastructure for its 5G and Fiber businesses, both high-growth areas.
These investments seem to be paying off, with AT&T making respectable strides in both areas. In Q2, its postpaid phone subscribers (customers billed monthly after using the service) increased by 1.6 million customers to 71.9 million. The average revenue per user (ARPU) also increased from $55.63 in 2023 to $56.42 this year.
Fiber, which is high-speed internet delivered via fiber-optic cables, also experienced good growth. AT&T’s fiber customers grew over 14% year over year to 8.8 million subscribers. ARPU followed the same trend, increasing from $66.70 to $69.00.
Both 5G and fiber are growth areas for AT&T. As the top player in an industry that’s become indispensable, it’s a company you can feel comfortable holding on to for the long haul.
Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.