Stocks are having another roller coaster week and, in this volatile market, many investors are increasingly looking to generate relatively safe passive income from dividend-paying stocks. If that sounds like you, then you may want to read on. Today I’d like to discuss the short- and long-term outlook for AT&T (NYSE:T) stock.
Although I believe T stock belongs in a long-term income-generating portfolio, I expect market volatility to continue in June. Therefore, we can expect price choppiness in AT&T stock, too. With the shares down about 6% since May 20, any further pullbacks in the coming weeks would be a sign to investors to consider buying into the shares. With that said, let’s take a deeper look into what makes T stock a good long-term investment.
Diversified Revenue Stream
AT&T reported Q1 2019 earnings on April 24. With a market capitalization of $230 billion, the Dallas-based group breaks down revenue into six main segments.
- Mobility (includes wireless subscribers)
- Entertainment Group (includes DirecTV and U-Verse customers)
- Business Wireless (provides services to companies and the government)
- Latin America (includes Latin American and Mexican operations)
- Warner Media (includes HBO, Turner and Warner Bros.)
- Xandr (handles all advertising business)
AT&T’s domestic wireless business is neck and neck with Verizon Communications (NYSE:VZ) for market share.
In June 2018, a federal court approved the merger of AT&T’s $85 billion acquisition of Time Warner — a deal that has turned AT&T in a media giant and “content king.” This merger has been weighing on T stock price for some time; however, the rest of 2019 should see the question marks slowly disappear.
As internet-based communication becomes increasingly integrated into our daily lives, I find AT&T shares well-positioned to benefit from various commercial opportunities that would eventually benefit the share price.
AT&T Stock Has Strong 5G Prospects
Over the past few years, T stock has lagged behind the broader market. Yet, the company has a strong brand and wireless infrastructure — two factors that are likely to make it a dominant player in the 5G sphere.
The new 5G technology will boost productivity and growth globally. 5G will also be at the center of the infrastructure for building smart cities. Coupled with a trailing price-to-earnings ratio of about 12x, T stock deserves further due diligence in the tech world that is getting ready for 5G dominance. In December 2018, AT&T launched its own 5G network in over a dozen U.S. cities.
It is the second major telecommunications provider to do so after Verizon. The first wave of 5G cities includes Atlanta, Charlotte, Raleigh, Dallas, Houston, Indianapolis, Jacksonville, Louisville, Oklahoma City, New Orleans, San Antonio, and Waco, Texas.
T Stock’s Improving Balance Sheet
Most long-term investors do not want to be constantly thinking about the fundamental strength of the stocks in their portfolios. AT&T’s balance sheet has been improving in recent quarters — another reason why I am interested in T shares long-term.
The improving fundamentals are possibly why AT&T stock price has gone up even though the company posted a subdued quarterly report.
The company’s key Mobility wireless segment generated revenue of $17.57 million, up 1.2% year-over-year. And the company achieved 80,000 postpaid phone net adds vs. 49,000 postpaid net adds in the year-ago quarter. Wall Street welcomed the news that the mobility segment has increased revenue.
On a final note, over the past few quarters, AT&T’s debt load has been on Wall Street’s radar. The company finished 2018 with a debt load of $171 billion.
Acquiring Time Warner has bloated this debt load. However, the communications giant is now working to cut costs and the debt at the same time. For example, it has recently sold its minority stake in Hulu, a premium streaming service, to its other owners Walt Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA), for almost $1.5 billion.
Management realizes the importance of decreasing the level of debt sooner than later. Therefore, I am still comfortable with this amount on the books.
AT&T Stock Dividends
In general, big blue-chip names tend to be consistently generous dividend payers. And telecommunications companies have traditionally been seen as relatively safe dividend investments. One such income-investor favorite has been T stock.
Experienced dividend investors also pay close attention to a company’s free cash flow as dividends are ultimately paid out of cash. AT&T is a large business that generates a lot of cash. The group has recently confirmed that it will have about $26 billion in free cash flow this year.
In addition to the company’s strong earnings power through telecom and media-related operations, T stock also offers a strong dividend yield at over 6.5%, which is a big attraction for many long-term investors seeking strong stocks to buy for 2019 and beyond.
Finally, over the past 35 years, AT&T has a history of increasing dividends annually. This is yet another important reason why I believe T stock belongs in a capital-growth portfolio. As long as investors still believe in T stock’s prospects, the hefty dividend yield keeps them from panicking and selling the shares.
Should You Buy AT&T Stock in June?
Many stocks may continue to be volatile in June, and I would not advocate trying to identify stocks that could be immune to a U.S.-China trade war.
T stock is likely to range trade with a downward bias, possibly until its next earnings report in late July. Yet if AT&T stock price declines further, especially toward $27.50, long-term investors may find it particularly attractive.
If you aren’t already long T stock, you may want to remain on the sidelines and wait for a pullback. I’d also consider buying covered calls in conjunction with going long on AT&T shares.
Consider that Wall Street regards telecoms’ revenues to be relatively safe during an economic slowdown, since not many people would give up their phone account in a slowdown, unless their personal economic situation got really bad.
But creating growth opportunities in a mature industry like telecommunication services still requires proactive management, like that of AT&T. The 5G revolution should also be a strong catalyst for the stock price.
Therefore, despite any potential short-term price weakness, T stock belongs to a diversified portfolio. Amid all the recent market volatility, I regard AT&T as one of the key telecom stocks to buy for value and stability.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.