I last covered AT&T stock (NYSE:T) back in late May and rated it a hold at the time, as I observed that the company’s Q1 results showed it making solid progress, particularly with its free cash flow generation and debt reduction. However, I remained neutral on the stock due to the valuation seeming a bit rich. Since then, the stock has only pushed higher, making the valuation look even more extended. On the other hand, the company recently reported Q2 results, so I will be sharing my latest take on the stock in light of these results, as well as the fact that multiple prominent billionaires have been buying significant amounts of the stock recently.
T Stock Q2 Results
Overall, AT&T’s results in the second quarter were pretty solid, with year-over-year growth in postpaid phone subscribers, mobility service revenues, mobility EBITDA, fiber subscribers, fiber revenue, and consumer wireline EBITDA. In particular, the fiber business and the consumer wireline EBITDA saw strong growth, with 17.9% year-over-year revenue growth in the fiber business and 7.1% year-over-year growth in consumer wireline EBITDA. Perhaps best of all, free cash flow increased by 9.5%, which is a very positive trend, as its CapEx discipline efforts are bearing fruit. This strong cash generation resulted in continued progress in the company’s debt reduction efforts, as overall capital investments declined by a billion dollars year over year. This resulted in net debt being down meaningfully year over year, and the net leverage ratio falling from 3.1 times to 2.87 times year over year.
As a result, the balance sheet is now in solid shape, with about 95% of its long-term debt at a fixed interest rate with a weighted average term to maturity of 16 years. The company emphasized that it continues to be on track to reach its target net debt-to-adjusted EBITDA ratio of 2.5 times sometime in the first half of 2025. This all makes its dividend quite sustainable and seems to show that the AT&T investment thesis is playing out nicely.
In addition, several billionaires have clearly bought into the thesis as well, with Ken Griffin of Citadel Advisors, Cliff Asness of AQR Capital Management, Ray Dalio of Bridgewater Associates, and John Overdeck and David Siegel of Two Sigma Investments all being notable buyers of AT&T stock in the second quarter.
Why I Am Not Buying T Stock
With all this said, does that mean I think AT&T stock is a good buy right now? No, I do not think so at all, and the reason for this primarily boils down to valuation.
Yes, the company is doing a good job with its balance sheet. Yes, it has the endorsement of billionaires. Yes, the stock price has been moving sharply higher lately. And yes, the 5.8% dividend yield looks attractive and should be very sustainable for the foreseeable future. However, from a total return perspective, AT&T is not nearly as attractive.
T stock is still only expected to grow at about a 2% to 3% CAGR through 2028. This, combined with the 5.8% dividend yield, delivers a roughly 8% annualized total return outlook. To put this into clearer perspective, the company’s recent numbers show little evidence that T is going to beat those estimates. Year-over-year revenue actually declined by $100 million, and adjusted EBITDA only increased by a meager 1.8% year over year. On top of that, adjusted earnings per share declined by a whopping 9.5% year over year, and cash from operations declined by $800 million year over year.
On top of that, there is very little potential for valuation multiple expansion due to the weak growth and the fact that its EV/EBITDA valuation of 6.7 times is currently at a premium to its historical average of 6.5 times. This means that AT&T does not look to be particularly overvalued and could be a decent holding as part of a well-diversified retirement income portfolio. However, for investors looking to maximize total returns, there are many better opportunities at the moment. As a result, I remain on the sidelines and rate the stock a hold. I think investors should wait for a material pullback to a dividend yield of at least 7% before buying the stock.
Investor Takeaway
T management is finally beginning to earn some trust back from investors by doing what they said they are going to do: be more disciplined with capital allocation and pay down debt while increasing free cash flow generation. Moreover, billionaire investors have been piling into the stock, giving its investment thesis additional credibility. That being said, the growth for the business is still far too low to make it a compelling opportunity for total return investors. As a result, it remains a bond-proxy dividend stock but is unattractive for investors looking to achieve long-term total return outperformance.
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