On Thursday, Moody’s credit rating agency gave investors reason to panic when it lowered its outlook on the U.S. telecom industry to negative from stable. The agency cited fierce price wars between carriers as reason for its concern, saying that new unlimited data plans are going to weigh on the industry’s revenue growth potential, while simultaneously pushing telecom firms to invest more heavily in their own operations to keep up with increased usage.
The news is likely weigh on shares of AT&T Inc. (NYSE:T) as T stock investors begin to question whether telecom stocks are worth keeping in their portfolios.
The Moody’s downgrade is definitely not to be ignored, but AT&T stock investors can take comfort in the fact that the ratings agency didn’t uncover any breaking news — its concerns are something that Wall Street has been talking about for years.
One of the risks facing T stock is the fact that it operates in a highly competitive industry. Price wars between big names like Verizon Communications Inc. (NYSE:VZ), T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) have been going on for some time, and while unlimited data plans are going to put some strain on the companies financially, AT&T stock is likely to be able to weather that storm competently.
AT&T Stock: Picking A Winner
AT&T is in a good place to survive the wireless wars that Moody’s is cautioning against. The company has been building out its future by trying to make its service more valuable to its clients by expanding its offerings. The company’s potential Time Warner Inc (NYSE:TWX) acquisition coupled with its DirecTV integration are both signs that the company has an eye on the future and is working to overcome the difficult environment that telecoms face.
Not only does T stock offer a solid position because of the its status as an industry giant, but the firm has a solid financial position that will help it survive in a price war. Furthermore, acquiring TWX is likely to increase AT&T’s margins because the firm’s content costs will decrease significantly. Also, the Trump administration’s softer corporate tax scheme should also add another layer of financial padding to the company’s balance sheet as well.
It’s also important to note that one of the most compelling reasons to own T stock is the company’s hefty dividend payments, and those are unlikely to change. The firm is currently offering a 4.6% dividend yield, which investors can expect to continue in the years to come.
The AT&T dividend has consistently increased each year for the last three decades as well, so that figure will likely increase. While it is somewhat of a concern that T stock has a 90% payout ratio, the company has a strong, reliable cash flow that income investors can take comfort in.
Bottom Line on T Stock
AT&T stock investors should hang on to their shares despite the negativity surrounding the telecom sector. If the shares make their way lower in the wake of the Moody’s downgrade, investors may consider starting up a position of snapping up additional shares. If T stock makes its way low enough to offer a 5% yield, investors should make the most of it and get on board quickly because the stock is unlikely to remain that low for long.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
