After Earnings, Is AT&T Stock a Buy, a Sell, or Fairly Valued?

AT&T T released its first-quarter earnings report on April 24. Here’s Morningstar’s take on AT&T’s earnings and the outlook for its stock.

Key Morningstar Metrics for AT&T

• Fair Value Estimate: $23.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 6.57%

What We Thought of AT&T’s Q1 Earnings

• AT&T’s results were largely as expected during the quarter. Free cash flow was a major focal point after disappointing results during the first quarter a year ago. The firm generated $3.1 billion in the quarter, up from $1 billion last year. This improvement primarily reflects better working capital management, but the underlying business has also performed well, with adjusted EBITDA up more than 4% year over year.
• AT&T continues to push on wireless customer retention while deemphasizing customer acquisition. The firm’s wireless customer churn rate was the lowest of the three major US wireless carriers, but it also has seen a steady decline in the pace of net customer additions. It was the only of the three carriers not to post better net postpaid phone customer additions year over year. However, AT&T management has challenged that result by indirectly claiming that the other two carriers are subtly inflating their numbers.
• Wireless revenue growth has decelerated and now lags T-Mobile TMUS and Verizon VZ. A big reason for this discrepancy is that T-Mobile and Verizon have pushed far more aggressively into the fixed-wireless broadband market. AT&T is now pushing into this business as well, but it’s still taking a more measured approach.
• As with Verizon, we believe AT&T’s dividend yield is excessively high for a firm and industry that should deliver stable, modestly growing revenue and profitability in the coming years.

Fair Value Estimate for AT&T Stock

With its 4-star rating, we believe AT&T’s stock is undervalued compared with our long-term fair value estimate of $23 per share. Our rating assumes AT&T will deliver modest revenue growth and gradually expand margins over the next several years as its wireless and fiber network investments pay off. Our fair value estimate implies an enterprise value of 7.4 times our 2024 EBITDA estimate and equals a 10% free cash flow yield based on actual 2023 results.

In wireless, we expect AT&T will slowly gain market share over the next few years. We believe postpaid revenue per phone customer will grow modestly amid a relatively stable competitive environment, surpassing $60 per month in 2028 versus less than $56 in 2023. We estimate AT&T generates around $2 billion annually from connected devices, such as cars. We model this revenue increasing roughly 40% over the next five years as things like edge computing gain adoption, but this estimate is highly uncertain. In total, we expect wireless service revenue to increase a bit more than 3% annually on average through 2028, with wireless EBITDA margins holding in the low 40s, as cost-efficiency efforts and benefits from slower customer growth offset rising network operating costs.

Read more about AT&T’s fair value estimate.

Economic Moat Rating

Wireless is AT&T’s most important business. Returns on capital in wireless have eroded somewhat in recent years as the firm has spent heavily on wireless spectrum and invested to put that spectrum to use. We estimate the wireless business produced a return on capital in 2023 of roughly 9%, or about 11% excluding goodwill, modestly above our estimate of the firm’s cost of capital. These figures are down from about 10% and 12% in 2018. Over those five years, segment operating income is up 19% cumulatively while the invested capital base has expanded about 30%, primarily on $40 billion of spectrum purchases.

We expect wireless returns will remain ahead of AT&T’s cost of capital. Verizon, AT&T, and T-Mobile dominate the US wireless market, claiming nearly 90% of retail postpaid and prepaid phone customers and supplying the network capacity to support most other players. Providing solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base requires incremental investment in network capacity, a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about AT&T’s economic moat.

Financial Strength

AT&T’s net debt stood at $129 billion at the end of the first quarter of 2024, leaving net leverage at about 2.9 times EBITDA. This load is far higher than the firm has operated under in the past. Immediately before its current capital deployment binge began in 2012 (with a round of heavy share repurchases), AT&T typically carried leverage of around 1.5 times EBITDA. Still, the firm’s debt load is reasonably similar to Verizon and T-Mobile’s.

AT&T’s dividend payout totals about $8 billion annually, down from $15 billion in 2021. The dividend consumed about 50% of free cash flow in 2023 versus more than 80% in 2021. We think the dividend policy makes sense, leaving substantial excess cash to reduce leverage and make network investments, which we believe is vital to AT&T’s long-term health.

Read more about AT&T’s financial strength.

Risk and Uncertainty

The cost of maintaining dominance in the wireless industry by controlling spectrum has been exceptionally high. Over the past few years, AT&T has spent $40 billion on licenses, with few prospects for incremental revenue.

Advancing technology may eventually swamp AT&T’s wireless business, enabling many other firms to enter the market and further commoditizing this service.

AT&T’s massive debt load could catch up with it. The firm carries far higher leverage than it historically has, and its dividend payout remains high. Lead liabilities could be an additional burden.

Read more about AT&T’s risk and uncertainty.

T Bulls Say

• Following a period of investment, AT&T will hold a nationwide 5G wireless network with deep spectrum behind it and a fiber network capable of reaching nearly one-fourth of the United States.
• AT&T has the scale to remain a strong wireless competitor over the long term. With three dominant carriers, industry pricing should be more rational going forward.
• Combining wireless and fixed-line networks with new technologies and deep expertise makes AT&T a force in enterprise services.

T Bears Say

• The cost of maintaining dominance in the wireless industry by controlling spectrum has been exceptionally high. AT&T has spent $40 billion over the past three years on licenses, with few prospects for incremental revenue.
• Advancing technology may eventually swamp AT&T’s wireless business, enabling many other firms to enter the market and further commoditizing this service.
• AT&T’s massive debt load could catch up with it. The firm carries far higher leverage than it historically has, and its dividend payout remains high. Lead liabilities could be an additional burden.

This article was compiled by Leona Murray.