If you're an everyday investor in search of stocks that can pay you steadily increasing sums, America's telecommunications oligopoly is a good place to start. At the moment there are just three companies with nationwide 5G networks, and new subscribers who are likely to stick around a long time are flocking to their services.
AT&T(NYSE: T) offers a 5.1% dividend yield at recent prices. The stock has risen about 44% over the past year, and investors want to know if it can keep soaring. Here's a closer look at recent results to see if this telecom giant belongs on your buy list.
Why AT&T stock is soaring
Shares of AT&T are up by about 44% over the past year. AT&T's stellar performance is partly due to a low starting point. The stock fell hard in 2022 after the company adjusted its dividend payment downward to compensate for the spinoff of its media assets.
Now that AT&T doesn't have to worry about cord-cutters, it can focus on growing its roster of mobile and broadband internet subscribers. Folks are generally hesitant to change their internet service providers, so the cash flows this company produces could be extremely reliable.
AT&T hasn't started raising its quarterly payout again, but a return to regular payout bumps in 2025 seems likely. During the year ended September, net debt fell by 2.3% to $125.8 billion. That works out to 2.8 times adjusted earnings before interest, taxes, interest, and depreciation (EBITDA) over the past 12 months.
AT&T expects its ratio of net debt to adjusted EBITDA to reach a target of 2.5 in the first half of 2025. Management hasn't made explicit promises, but investors can reasonably expect the return of annual payout raises once debt reaches its target level.
Total third-quarter revenue fell by 0.5% year over year, but the headwinds holding AT&T back should steadily subside. Equipment sales fell 5.7% year over year to $4.5 billion because consumers are increasingly hesitant to upgrade their smartphones.
It's harder to find reasons to upgrade today's smartphones, but sooner or later the ones we have will need to be replaced. We don't know how low equipment sales could fall, but AT&T must be getting close to a bottom.
In addition to sliding smartphone sales, AT&T is dealing with lower demand from businesses for legacy voice and data services. Business wireline sales tanked 11.8% year over year to $4.6 billion.
Why AT&T could rise further
Now that the heaviest losses regarding equipment and legacy voice sales are in the rearview mirror, it will be easier for mobile and broadband internet subscription sales to push AT&T's big needle forward.
Third-quarter broadband revenue rose 6.4% year over year, and investors can look forward to more growth. AT&T Fiber has added more than 200,000 customers for 19 consecutive quarters. There are 28 million consumers near an AT&T Fiber line, and this figure will rise to 30 million by the end of next year.
Broadband subscriptions aren't the only reason we'll see AT&T continue rolling out more fiber optic cables. The company's share of postpaid mobile subscribers is 5% higher in areas where AT&T Fiber is available.
Third-quarter mobile service revenue rose 4% year over year, and this trend could accelerate. As AT&T rolls out more fiber optic cables, more consumers will want to combine their broadband and mobile internet service providers.
Time to buy?
AT&T's stock price is way up, but it's still trading for around 9.9 times forward-looking earnings expectations. That's an appropriate valuation if you assume the lack of growth we've seen over the past couple of years continues.
With shrinking legacy voice and equipment revenues getting close to a bottom, steady annual growth at a low-single-digit percentage seems more likely than continued stagnation. Adding some shares of this high-yield dividend payer to a diverse portfolio now, and holding them over the long run, looks like a smart move.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
