July 12, 2024

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AT&T Stock Is a Buy for This Reason

2 min read

building with _AT&T logo on front_AT&T_

The last few years have been a miserable time to own AT&T (NYSE: T) stock. Thanks largely to its dividend income, AT&T investors earned a total return of just 13% over the last five years, a span when the S&P 500 drove total gains of nearly 110%. Additionally, the company faces considerable financial challenges because it has to spend heavily to remain competitive with Verizon Communications and T-Mobile.

Nonetheless, AT&T has reached a point where it has become too compelling to ignore, and one factor likely makes it a buy regardless of the apparent trials that might otherwise derail the stock.

The one reason to buy

The reason to buy AT&T stock is its compelling valuation. The stock currently sells at a P/E ratio of 7. This is a small fraction of the S&P 500’s average P/E ratio of 26. Since numerous technology stocks experienced multiple significant expansions amid the AI-driven boom, such valuations are uncommonly low in today’s tech industry.

On the surface, AT&T’s dividend may bolster the appeal of the low valuation. Its $1.11 per share annual payout now offers a dividend yield of 6.7%. This is around 4.5 times the S&P 500’s average dividend return, which has now fallen below 1.5%.

Still, investors should approach this dividend cautiously. AT&T slashed the payout in early 2022 after 35 straight years of payout hikes. And considering its $138 billion total debt, the dividend could fall victim to further cuts as the company looks for ways to reduce that obligation.

AT&T stock may not be cheap for a reason

However, even if such a dividend cut leads to selling in the short term, investors need to remember that AT&T is one of only three 5G providers in the U.S. Since the company spent around $17.5 billion in capital expenditures over the previous 12 months, AT&T’s network should remain competitive from a quality standpoint.

Indeed, AT&T is adding customers. In the third quarter of 2023, the company reported 468,000 postpaid phone…

2023-12-24 07:25:00

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