AT&T (NYSE:T) is a global provider of telecommunications and technology services, operating in two key segments: communications and Latin America. The Communications segment provides wireless voice and data communications services, retailing handsets, wireless data cards, computing devices and related accessories through its company-owned network. third-party stores, agents and outlets.
Additionally, it offers virtual private networks, AT&T dedicated Internet, Ethernet, data services, security, cloud solutions, outsourcing, and managed and professional services to multinational corporations, small and medium-sized businesses, government and wholesale customers.
For full transparency, AT&T has been in the red in my portfolio since the day I initiated a position. Despite this, I am maintaining a position because of the cash flow it continues to provide. Including distributions, I’m up slightly, but that’s not the ideal performance for most investors looking to earn a higher total return. I use this stock as an income machine and throw distributions into higher quality positions. As long as the dividend remains safe, I have no reason to sell.
AT&T’s revenue growth is attributed to increases in subscribers and average revenue per user. The reported income amounted to $30.4 billion, reflecting an increase of $0.3 billion. Mobility services revenue grew 3.7%, contributing to a 4.6% year-to-date increase. Additionally, consumer broadband revenues saw notable growth, reaching 9.8%, and growth of 8.1% year-to-date.
Free cash flow, including $0.9 billion from DIRECTV, was $5.2 billion. Capital expenditures were $4.6 billion, with total capital investment including $1.0 billion in supplier financing payments. Year-to-date free cash flow for 2023 is $10.4 billion, up $2.4 billion, with DIRECTV cash flow $0.9 billion lower.
T job revenue of $30.35 billion, with a year-over-year increase of 1.0%. The company saw a notable 2.4% increase in cash from operating activities, to $10.3 billion. The company’s operational execution remains consistent and disciplined, resulting in profitable customer growth, as evidenced by the addition of 468,000 postpaid subscribers. The low postpaid phone churn rate of 0.79% highlights the resonance of AT&T’s value proposition. T strategically focuses on high-value customers through deliberate segmentation, reinforcing its commitment to sustainable growth.
I think despite mixed results, AT&T has some potential here. Recent results are characterized by strong revenue and EBITDA growth, mainly driven by the increase in the number of high-quality subscribers. I’m still cautious, though, because when was the last time you remembered that AT&T’s cash flow wasn’t the company’s primary focus?
Last declared dividend of $0.2775/share, the current dividend yield is now around 6.8%. Fortunately, the payout rate remains around 45%, which does not yet give rise to concerns about the sustainability of the dividend. Even though the dividend was cut in 2022, I think they are in a good position to continue the current payout. Despite AT&T’s significant debt burden, I view it as a decent option for investors seeking protection against market fluctuations in reaction to future rate changes, as the price range is relatively stable.
According to estimates, the company’s annual dividend is expected to see a slight increase to $1.12 in 2024 and continue to grow to $1.13 in 2025. The assurance that AT&T’s dividend is well supported by its cash flow available is reinforced by the range of dividend estimates, affirming the likelihood of no dividend cuts or discontinuation of AT&T in the foreseeable future. Although AT&T carries significant debt, the adjusted debt-to-EBITDA ratio of approximately 2.6x is considered manageable for a robust cash flow entity like AT&T.
Several metrics indicate current undervaluation with T. For example, a quick reference to the P/E ratio shows that the current P/E is 6.75x compared to the 5-year average P/E of 7.96x. Additionally, T trades with a free cash flow (FCF) yield of 14%. Over the next 18 months, the company intends to use excess FCF to reduce debt and achieve its 2.5x leverage target. In the long term, they indicated a capital intensity of around 15%, significantly lower than current spending.
We can try to arrive at a rough estimate of a fair value by implementing a discount cash flow model. Use in subsequent years projected Total EPS of 2.47x, we can combine that with an average 5-year YoY EBITDA growth of 1.6%. Using this data, we can determine that an estimated fair value for T is around $25/share. This represents an upside potential of around 48% by the end of 2024, but it weighs heavily on management’s ability to grow by at least 1%. Management has been woefully inconsistent though, so I’m sticking with a hold rating to see how the next few quarters play out.
The weight of AT&T’s debt seems to be a matter of debate. Let’s put aside for a moment the question of whether this is manageable or not. Between costly spectrum auctions, digital infrastructure/ecosystem investments and development, and acquisitions have fueled a substantial increase in AT&T’s long-term debt. The debt has nearly doubled over the past decade, reaching a current total of $138 billion.
This places AT&T among the most indebted companies in the world. The weight of this debt is reflected in annual interest charges exceeding $6 billion. Older debts, originally secured at more favorable rates, now face the challenge of being refinanced at significantly higher costs. Indeed, despite the rate cuts anticipated by the Fed, we will remain in an environment with a higher average rate range.
AT&T (T) bills itself as a global provider of telecommunications and technology services, navigating its key communications and Latin America segments. Despite a challenging performance within my portfolio, the company continues to be a reliable source of income, leveraging its cash flow even amid market volatility.
The financial overview reveals commendable revenue and EBITDA growth, driven by quality subscriber acquisitions. Notably, AT&T’s strategic focus on disciplined execution and high-value customer segments has contributed to consistent profitability. The company’s commitment to maintaining a competitive dividend, supported by strong free cash flow, inspires confidence in its long-term stability.
While recognizing the substantial debt burden, the undervalued status, assured dividend yield and potential capital appreciation present an enticing risk/reward proposition for investors. However, it is essential to recognize the associated risks, including high debt levels and potential refinancing challenges. Despite these considerations, AT&T remains positioned for growth and its current valuation suggests an attractive investment opportunity for those willing to navigate the complexities.