U.S. telecommunications giant AT&T (T -1.23%) has lulled investors to sleep with its poor performance over most of the past decade. But the stock has enjoyed a face-ripping rally over the past year, surging nearly 60% at the time of this writing. Suddenly, AT&T is a market-beating winner.
Some of the credit for that turnaround goes to the company, which has worked through a cumbersome debt load and failed acquisitions to return to its roots as a telecommunication-focused company. The company also rightsized its dividend a few years back, freeing up cash flow, and still offers a 4.1% yield today.
So, is the stock a buy? I dove into the numbers to determine whether AT&T can stay hot, and I've shared that below. AT&T's appeal ultimately depends on you. Here is what you need to know.
AT&T's epic rally is likely near its end
There's no denying that AT&T is a better business than it was a decade ago. AT&T used blockbuster mergers to expand into the streaming and entertainment industries, ultimately failing to piece it together. When it was all said and done, AT&T abandoned the idea, leaving it with as much as $200 billion in long-term debt at its peak. Fast-forward to today, and AT&T has lowered that to $123 billion. It's not perfect, but AT&T has an investment-grade credit rating from the major rating agencies.
A year ago, AT&T traded at a price-to-earnings (P/E) ratio under 9, a heavy discount to the broader market. Such low valuations, especially in a bull market, are appropriate for companies with serious problems, and AT&T isn't that anymore.
The stock market has repriced AT&T stock over the past year, resulting in a massive rally. AT&T's P/E ratio has risen to 18. Now that AT&T's stock trades at a price that reflects a healthier business, investment returns will depend more on organic growth than an expanding valuation.
NYSE: T
Key Data Points
Here is the problem: AT&T's core business doesn't grow very fast. Most U.S. adults have cellphones or smartphones, leaving the three companies that dominate the field (AT&T, Verizon Communications, and T-Mobile US) to fight over a relatively stagnant customer base. AT&T is guiding for low-single-digit revenue growth this year, and analysts estimate the company will grow earnings by just 4% annually over the next three to five years.
One could argue that AT&T is a little expensive at 18 times earnings for that growth, so investors shouldn't expect the stock's recent hot streak to continue. I don't enjoy delivering bad news, but if you were considering buying AT&T stock because you want substantial returns, saw the stock's one-year performance, and hope it continues, you'll probably be disappointed.
Who might want to buy AT&T stock today?
That doesn't mean nobody should buy AT&T stock. It turns out that AT&T does some things well, which could make it a buy for you.
Some investors focus more on dividend income than maximizing share price gains. AT&T's 4.1% yield is higher than most stocks', and the dividend is well supported by earnings with a manageable 52% dividend payout ratio. AT&T's valuation isn't excessive, so I don't think there's a high risk of catastrophic losses associated with grossly overpaying for a stock. Thanks to its slow business growth, it seems more likely that AT&T will trudge along, lagging the broader market.
It would also be good to know that AT&T has a low beta of just 0.52. A stock's beta reflects its volatility relative to the broader market. Since AT&T's beta is less than 1, it tends to be less volatile. That means it won't go as high when the market does well, but it should also hold up better when it drops. That can bring peace of mind to retirees and others trying to avoid dramatic price swings in their portfolios.
In summary, the low-hanging fruit in AT&T stock is likely gone, but the stock could still be a solid buy for retirees and other income-focused investors.
