As a customer, I have many reasons to dislike AT&T (NYSE:T). Their service is a joke. Their products are pricey and underwhelming, at least in my market. And the idea of switching to DirecTV is laughable. As an investor, T stock has also delivered its own, sad punchlines.
Telecommunications stalwarts are supposed to represent the hidden part of your portfolio. They don’t make much noise because that’s not their intention. Unlike a sexy tech startup, telecoms offer consistent reliability. We’re talking slow growth that occurs at a predictable pace. In exchange for the boredom, we receive healthy passive income.
But last year, AT&T made headlines for all the wrong reasons. After a tumultuous time, the T stock price ended 2018 down nearly 23%. Investors simply got tired of watching the company get bloated without delivering substantive results.
Certainly, I can appreciate the frustrations. However, I also believe that the volatility in T stock is overdone. We’re still talking about an influential organization, one that could surprise naysayers in the coming years. Here are three reasons why I’m buying what “Ma Bell” has to sell to investors:
Massive Network a Plus for AT&T Stock
Over the past several years, AT&T has invested significantly on its telecommunication networks. While the company’s efforts haven’t moved the T stock price higher, I’m optimistic about its longer-term prospects.
In the Memphis area, AT&T spent $275 million for various upgrades, including LTE coverage and bolstering network capacity. On the other side of the country, T invested more than $400 million upgrading both wireless and wired networks.
One of the common criticisms directed against AT&T stock is that management spends too much money. Conspicuous failures such as the DirecTV buyout — especially in the cord-cutting era — add fuel to the bearish fire.
I’m not going to dismiss the profligate spending, nor am I going to dismiss the debt load. At around $170 billion, the figure imposes an eyesore in the balance sheet. Plus, the liabilities have picked up in recent quarters due to high-profile acquisitions.
Yet it’s also this spending that makes AT&T stock compelling for patient investors. Thanks to its investments, AT&T levers a formidable network presence. In fact, one of the key reasons why Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) wanted to merge was to compete more vigorously.
Both telecom firms are committed to the next-generation 5G rollout. But individually, they can’t compete with large-scale rivals like AT&T or Verizon (NYSE:VZ). Combined, though, they have a better shot.
My point isn’t about the morality of mergers. Rather in this case, both Sprint and T-Mobile have acknowledged AT&T’s daunting reach. For me, that’s a clear signal to buy T stock in this weakness.
Potential Gamechangers in 5G and Content Streaming
Despite its strengths in the network, Verizon scored a pivotal victory, becoming the world’s first commercial 5G service. Obviously, this is a big positive for the AT&T rival, as being the first to market — especially in an ultra-competitive sector — often affords key advantages.
And while I’m generally bullish on VZ for the same things as AT&T stock, the former’s 5G win isn’t decisive. As InvestorPlace feature writer James Brumley mentioned, it’s more of a “paper” victory. For instance, subscribers in limited markets can enjoy home-based 5G broadband services. That’s a far cry from where we want the next-gen tech, in our smartphones.
Unfortunately, the hardware must play significant catch-up to the platform. Likely, this gives AT&T time to implement 5G the proper way. Although Verizon won the initial battle, they used non-standard equipment to achieve that victory.
Another component that could drive the T stock price higher is the underlying company’s content umbrella. True, AT&T paid a hefty sum to acquire media giant Time Warner. As I previously mentioned, management attracted sharp criticism for the extra liability imposed on the balance sheet. But in this business, you have to pay to play.
This is one of the reasons why Disney (NYSE:DIS) bought out Twenty-First Century Fox’s (NASDAQ:FOXA) entertainment assets.This same sentiment also explains Sony’s (NYSE:SNE) motivation to completely own EMI Music Publishing’s equity. If you want to thrive in today’s entertainment landscape, you must leverage natural synergies.
For AT&T stock to benefit from management’s shift towards content streaming, the company must first offer compelling content. The Time Warner deal accomplishes exactly that, whether with entertainment via HBO or through news streaming via CNN.com.
T stock and Those Dividends!
Finally, we’ve arrived at the real reason why I’m very interested in AT&T stock. I’m not suggesting that the other reasons are invalid. However, the telecom giant’s payout provides an almost-guttural reason to jump aboard.
At the present T stock price, it has an absolutely-ridiculous 6.9% dividend yield. Discounting recent performances, that’s about the long-term average return of the S&P 500 index. If you think about it, investing in the telecom firm offers similar confidence and stability.
For starters, AT&T stock has a history of consistent payouts. Moreover, this is not a typical high-yield investment in that you’re constantly worried about viability. Barring a nuclear apocalypse, I’m sure the company will outlive us all.
Plus, I don’t think that the T stock price will melt down like other legacy companies. While telecoms are boring, they’re intrinsically tied into our push for digitalization of everything. Essentially, if anything tech is involved, it will directly or indirectly involve AT&T.
Fundamentally, that’s a no-brainer. But when you add in the discounted valuations and the insane dividends? You’d really have to hate the company to avoid AT&T stock altogether.
As of this writing, Josh Enomoto is long SNE. He is also planning to buy T stock over the next 48 hours.