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 has recently pulled back. 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.

Recent Performance and Fundamentals

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 and generated $4.4 billion in free cash flow. Additionally, AT&T bought back $1 billion in stock during the second quarter, with a total of $4 billion planned for 2025. The company expects 2025 free cash flow to come in at about $16 billion, with adjusted earnings per share between $1.97 and $2.07 AT&T Stock: Is This Free Cash Flow Machine A Buy On The Dip?^[1].

Pullback Concerns

While AT&T's fundamentals are strong, the recent pullback may continue due to valuation concerns. The company's price-to-earnings ratio sits at 12.78 times, compared to the last five-year average of 8.75 times. This is quite high given the rise in interest rates. Additionally, AT&T's dividend yield of 4.13% is weak compared to its five-year average of 6.37%. 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 AT&T Stock: Is This Free Cash Flow Machine A Buy On The Dip?^[1].

Dividend Growth Outlook

Analysts estimate AT&T to grow its dividend at a 0.8% CAGR through the end of the decade, which barely keeps up with the Federal Reserve's target annualized rate of inflation. This slow dividend growth, combined with the company's execution risks and regulatory challenges, makes the stock less attractive AT&T Stock: Is This Free Cash Flow Machine A Buy On The Dip?^[1].

Investor Takeaway

AT&T's strong fundamentals and free cash flow generation make it a potential buy on the dip. However, the stock's elevated valuation and slow dividend growth may justify its recent pullback. Investors should wait for the stock to trade in line with its recent five-year averages on an EV/EBITDA, price-to-earnings, and dividend yield basis before considering a buy. Until then, the stock may remain a hold or sell.

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