AT&T Stock Dips: Is This Free Cash Flow Machine a Buy?

AT&T (T) stock has been a strong performer since mid-2023, but has pulled back recently. Despite this, the company remains a free cash flow machine with a history of generating consistent returns. As a finance expert with experience at Bloomberg, I believe AT&T's strong fundamentals and stable cash flows make it a potential buy on the dip.

AT&T (T) stock has been a strong performer since mid-2023, but it has recently experienced a pullback. Despite this, the company remains a free cash flow machine with a history of generating consistent returns. As a finance expert with experience at Bloomberg, I believe AT&T's strong fundamentals and stable cash flows make it a potential buy on the dip.

AT&T's recent Q2 results were solid, with 3.5% year-over-year service revenue growth and 3.5% year-over-year adjusted EBITDA growth. The company also reported 6% year-over-year growth in its adjusted earnings per share, while free cash flow came in at a strong $4.4 billion. Additionally, postpaid phone net adds came in at over 400,000, with postpaid phone churn at 0.87%. The company bought back $1 billion during the second quarter, with a total of $4 billion of buybacks planned for 2025. This elevated capital return combines nicely with the company's dividend yield of a little over 4% to make it a dividend machine for shareholders.

The company expects 2025 free cash flow to come in at about $16 billion, while adjusted earnings per share should come in between $1.97 and $2.07. The company is also accelerating its fiber run-rate build-out. Despite these positive trends, the stock has pulled back sharply over the past few weeks. The main reason for this pullback is that the company's valuation has gotten ahead of itself, and its leverage remains elevated.

The company's price-to-earnings ratio sits at a whopping 12.78 times compared to the last five-year average of just 8.75 times. This is quite high when you consider that interest rates have risen meaningfully over that period of time. Additionally, its dividend yield of just 4.13% is quite weak compared to its 6.37% average dividend yield over the past five-year period. The company's enterprise value-to-EBITDA multiple of 7.54 times is also higher than its weighted average over the past half-decade of 7.23 times, making it appear overvalued on that metric as well.

Analysts estimate AT&T to grow its dividend at a 0.8% CAGR through the end of the decade, meaning its dividend income will barely keep up with the Federal Reserve's target annualized rate of inflation. The company also faces significant execution risks due to its high CapEx and competitive industry, as well as regulatory, closing, and integration risks from its EchoStar spectrum acquisition. Furthermore, AT&T's nearest peer competitor, Verizon (VZ), currently yields 6.7% and trades at materially lower P/E and EV/EBITDA multiples than AT&T does.

Despite these challenges, AT&T's strong fundamentals and stable cash flows make it a potential buy on the dip. However, its leverage ratio remains elevated, and its dividend growth remains slow, which justifies the elevated valuation. Therefore, I would need to see the stock trading at least in line with its recent five-year averages on an EV/EBITDA, price-to-earnings, and dividend yield basis before viewing it as a potential Hold rating. Meanwhile, until it gets closer to those metrics, AT&T is a Sell in my view. Even for it to move from a Hold to a Buy, I would need to see stronger signs of dividend growth than what currently exists.

References
AT&T Stock: Is This Free Cash Flow Machine A Buy On The Dip?^[1] https://seekingalpha.com/article/4828494-att-stock-free-cash-flow-machine-buy-on-dip
AT&T (T) Ascends While Market Falls: Some Facts to Note^[2] https://finance.yahoo.com/news/t-t-ascends-while-market-214506391.html