AT&T's Undervalued Growth Potential Amid Bonus Depreciation Tailwinds

In 2025, the telecommunications sector is undergoing a quiet but profound re-rating, driven by technological inflection points and regulatory tailwinds. AT&T (T), once viewed as a utility-like dividend play, is now emerging as a compelling growth story, thanks to a confluence of tax incentives, disciplined capital allocation, and a strategic pivot toward fiber and 5G. The company's recent performance and forward-looking initiatives suggest it is undervalued relative to its long-term potential, particularly as it leverages the 2025 tax reform to accelerate infrastructure spending and enhance shareholder returns.

Bonus Depreciation: A Catalyst for Accelerated Growth

The 2025 tax reform, dubbed the “One Big Beautiful Bill Act,” has rewritten the rules of the game for U.S. corporations. By permanently reinstating 100% bonus depreciation for qualified property placed in service after January 19, 2025, the legislation has eliminated the scheduled phase-down of first-year depreciation deductions. For AT&T, this means a seismic shift in its capital expenditure strategy.

The company has pivoted its $6.5–$8 billion in projected tax savings (2025–2027) into a $3.5 billion fiber expansion plan, accelerating its deployment to 4 million customer locations annually. This surge in fiber deployment is not merely a capital play—it is a strategic move to capture the growing demand for high-speed connectivity driven by remote work, AI-driven applications, and streaming. By 2030, AT&T aims to reach 50 million customer locations with its in-region fiber network, with an additional 10 million via third-party partnerships.

The financial implications are equally compelling. AT&T's free cash flow is projected to exceed $18 billion in 2026 and $19 billion in 2027, a direct result of the tax savings and operational efficiency gains from its AI-as-a-Service (AIaaS) platform. These metrics position the company to reinvest in growth while maintaining a robust balance sheet.

Capital Return Dynamics: Balancing Growth and Shareholder Value

AT&T's capital return strategy in 2025 reflects a nuanced balance between reinvestment and shareholder rewards. The company's dividend yield of 3.95% remains competitive within the sector, particularly against peers like T-Mobile (TMUS), which prioritizes reinvestment over payouts, and Verizon (VZ), which offers a 6.17% yield but at the expense of growth. AT&T's return on equity (ROE) of 16.73% further underscores its ability to generate returns, though it trails T-Mobile's 19.23% and Verizon's 19.52%.

However, the real story lies in AT&T's share repurchase program. With a $10 billion authorization in 2025 and $1 billion repurchased in Q2 alone, the company is demonstrating aggressive capital discipline. Analysts project $4 billion in buybacks by year-end, leveraging its $4.4 billion in Q2 free cash flow (up 10% YoY). This compares favorably to Verizon's more conservative approach and T-Mobile's reinvestment-heavy model.

Strategic Re-Rating: A Telecom Sector Transformed

The telecom sector's re-rating in 2025 is underpinned by three key trends: 5G adoption, fiber competition, and ESG integration. AT&T's AI-driven network optimization has cut churn to 0.87% (the industry's lowest) and reduced operational costs by $10 million annually through route optimization. Meanwhile, its carbon neutrality goals and renewable energy procurement align with ESG-driven capital flows, a critical factor for institutional investors.

Regulatory tailwinds further bolster AT&T's position. The One Big Beautiful Bill Act's provisions for mid-band spectrum availability and fiber deployment align with FCC Chairman Brendan Carr's vision for U.S. technological leadership. AT&T's fiber expansion is expected to create jobs and bolster infrastructure, indirectly supporting its financial metrics.

Valuation Metrics and Market Confidence

Despite its strong fundamentals, AT&T's valuation remains compelling. The stock trades at a forward P/E of 13.30, significantly below its 16.79 trailing P/E and well below T-Mobile's 24.01. Analysts have raised price targets in recent months, with an average of $29.37 (6.04% upside from the current $28.02). Institutions, including The Vanguard Group and emerging hedge funds, now own 57.10% of the company, reflecting growing confidence in its strategic direction.

Investment Thesis: A Dual-Engine Growth Story

AT&T's re-rating potential hinges on its ability to execute on two fronts: infrastructure modernization and capital efficiency. The company's fiber expansion, supported by bonus depreciation, is a high-conviction bet on future demand. Meanwhile, its disciplined buybacks and pension funding (projected to reach 95% by 2026) enhance long-term stability.

For investors, the case for AT&T is clear. Its combination of undervalued growth, strong free cash flow, and strategic alignment with AI and ESG trends positions it as a standout in the telecom sector. With a projected 7.2% return of capital in 2026 (via dividends and buybacks), AT&T offers a rare blend of income and growth in a market increasingly focused on both.

In conclusion, AT&T's current valuation does not fully reflect its transformed business model. As it accelerates fiber deployment and leverages tax incentives to boost profitability, the company is poised for a meaningful re-rating. For those seeking a telecom stock with both defensive characteristics and growth potential, AT&T is a compelling addition to a diversified portfolio.