Dividend Stocks

Buy AT&T As It Bottoms and Begins to Rise

After months of turmoil, AT&T (NYSE:T) stock looks to have bottomed and is finally trending higher.

Source: Jonathan Weiss/Shutterstock

The iconic American company that is today the world’s biggest telecommunications company and the largest provider of mobile telephone services in the U.S. has struggled this year as its stock price has endured a roller-coaster ride of ups and downs before sliding 17% since May to now trades at less than $28. Year-to-date, T stock is down more than 4%.

The decline has been accelerated by two significant changes being undertaken by AT&T.

First, AT&T is merging its WarnerMedia subsidiary with Discovery (NASDAQ:DISCA) to create an new company called Warner Bros. Discovery. AT&T will spin off 71% of those shares to AT&T shareholders.

Second, AT&T’s DirectTV unit has been sold to a private equity firm. Once those two changes are finalized next year, AT&T will have no more media assets and plans to focus primarily on its wireless business. The divestitures will result in AT&T cutting its dividend payout by 50%, a move that has angered investors and caused much of the share price volatility.

But now, it appears that T stock may have finally bottomed and begun to turn a corner. With the share price still below $30, it provides an attractive entry point for potential new investors.

Leaner and Meaner

Dallas-based AT&T is looking to become a leaner and meaner company. It plans to use $50 billion from the Discovery and DirecTV deals to pay down its substantial debt of nearly $180 billion. The company has stated that it plans to reduce its net debt by 30% on a go forward basis.

As mentioned, AT&T plans to focus on its wireless communications and internet business, which has performed much better than its entertainment assets. (DirecTV cost AT&T $67.1 billion in 2015 and it is now selling it for $16.3 billion).

Focusing on wireless, particularly 5G internet, looks like the right move for AT&T. American fiber internet customers rate AT&T No. 1 in customer satisfaction and the company has among the lowest turnover rates in both phone and broadband internet customers.

Through the first two quarters of this year, AT&T reported revenue of $88 billion, a 5% increase compared with the first six months of 2020. Net income amounted to $9 billion in this year’s first half, a 55% increase.

The Dividend Issue

While AT&T’s wireless strategy looks like a smart long-term plan, T stock has been hurt by the short-term issue of the dividend cut. The reduction in AT&T’s dividend payout is a particularly hard pill for shareholders to swallow given that AT&T stock is a “dividend aristocrat.” AT&T has grown its dividend consistently for 37 consecutive years. AT&T’s stock has a forward yield of 7.38%, a 62.95% payout ratio, and a 1.72% growth rate over the past decade. Currently, AT&T pays an annual stock dividend of $2.08 per share.

After the spinoff of WarnerMedia, AT&T says it is targeting a 40% to 43% dividend payout ratio on free cash flow of $20 billion. This will result in $8 billion of annual payouts, or roughly $1.11 per share rather than the current $2.08. While that sizable cut has investors, understandably, concerned, they should take comfort from the fact that AT&T CEO John Stankey has said the company will continue to prioritize its dividend going forward.

Stankey should be able to make good on that pledge as AT&T’s debt is reduced and its financial situation improves.

Buy T Stock For Long-Term Gains

AT&T is undergoing substantial changes this year and its upcoming dividend cut is troublesome. But investors should look beyond the short-term turbulence and take the long view with the company and its stock. Once AT&T sheds its media assets, pares its debt, and is free to focus on its core wireless business, the company’s share price should respond and investors should be rewarded with future gains.

The dividend payout should be repaired in coming years. In the meantime, at less than $28 a share, AT&T stock is affordable and a bargain. T stock is a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.