For AT&T (NYSE:T) stock, the future continues to brighten.
Specifically, after the company agreed to spin off its media assets, it looks poised to benefit from multiple, powerful trends. Included in the latter category are government contracts, the proliferation of 5G, market share increases and a still-sizeable, competitive dividend.
I believe that the Biden administration, grateful for CNN’s help during last year’s elections, will look to reward AT&T by ensuring that it receives its fair share of the federal government’s spending on the expansion of broadband internet services. In my last column, I pointed out that:
The bipartisan infrastructure bill, which recently passed the Senate, includes $65 billion for the expansion of broadband infrastructure. Through its fiber network, AT&T is an extensive provider of broadband internet services.
Now it appears that the Biden administration is looking to find additional ways to reward AT&T. I’ve reached that conclusion because, on Aug. 25, the company received a five-year, $609 million deal from the State Department. Under the contract, the telecom giant will “provide ‘turnkey’ telecommunications solutions and support to the DOS’s more than 270 diplomatic posts and operations sites worldwide,” AT&T disclosed.
Between the funds that the company will receive via the infrastructure bill and other sizeable deals that it looks poised to obtain from the Biden administration, the conglomerate is very well positioned to get a big lift from government spending over the longer term. The revenue and profits from AT&T’s government deals, in turn, should meaningfully boost T stock.
A 5G Boost and Market Share Gains
Amid pent-up-demand, industry revenue from the sale of 5G smartphones will surge more than five-fold this year versus 2020, predicted Rick Kowalski, director of industry analysis and business intelligence at the Consumer Technology Association, according to VentureBeat.
In an effort to obtain a large share of the customers upgrading to 5G, AT&T is using aggressive discounts. Specifically, in the wake of the launch of Apple’s (NASDAQ:AAPL) new iPhone Pro recently, the telecom company intends to give it to some of its customers at no cost.
However, over time, I’m sure that the move will be very profitable for AT&T. After all, consumers who upgrade to the iPhone Pro 13, which, according to Apple, utilizes “the world’s fastest smartphone chip,” are likely to use much more data, lifting AT&T’s financial results in the process.
What’s more, AT&T’s offer is likely to increase its market share at the expense of other carriers who are not providing similar discounts.
And importantly, after the recently, relatively benign U.S. inflation report, I’m much more confident in AT&T’s ability to offer discounts without greatly undermining its profitability in the short term and the medium term.
A Competitive Dividend
Many on Wall Street have been upset about AT&T’s decision to meaningfully cut the dividend on T stock. The company is expected to cut its dividend to about $1.15 per share down from its current $2.08, InvestorPlace contributor Bob Ciura recently reported. But according to Ciura, with that dividend, AT&T’s yield, at its current share price, would come in at 4.2%. That’s not much below Verizon’s (NYSE:VZ) current yield of 4.7%.
And if AT&T gets as much money from the federal government as I expect it to, its dividend will probably actually end up being significantly higher than $1.15 per share.
The Bottom Line on T Stock
After eliminating the media assets that were an albatross around its neck, AT&T is poised to benefit meaningfully from government deals and higher data spending by its wireless customers.
Meanwhile, its dividend is still competitive with that of Verizon. However, according to Yahoo Finance, Verizon has a forward price-earnings ratio of 10.2x, while the forward P/E ratio of T stock is just 8.5x.
Given its positive catalysts, competitive upcoming dividend, and low valuation, AT&T looks like a very good name for income and value investors to buy.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.