Is AT&T stock a buy now?

AT&T (NYSE: T) has quietly emerged as an impressive turnaround story. Compared to the difficult past few years, which were pressured by disappointing earnings and weak trends in the mobile business, the latest results show an improving outlook. The stock has risen 34% in the past year and is currently trading at a multi-year high.

During a strong rally, investors often wonder how much upside potential the stock still has or if it's too late to get in. Could AT&T stock be a good addition to your portfolio now? Let's explore some reasons why you should stay bullish on this high-yielding telecom leader.

A strong first half of the year until 2024

It was just over two years ago that AT&T completed one of the largest restructurings in its history with the spin-off of the WarnerMedia group in 2022. The deal marked a turning point for the company, which turned away from investments in the entertainment industry and now focused on its strengths in telecommunications.

It seems the new strategy is paying off, as stronger underlying profitability is the big theme for AT&T this year. In the second quarter, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 2.6%, while free cash flow was $4.6 billion, up $0.4 million from the prior year.

Although the long-term decline in the company's wireline segment continues to weigh on revenue, the core mobility group and the wireline segment for residential customers are experiencing a revival of momentum. AT&T is benefiting from a stable macroeconomic environment on the demand side and the impact of the gradual price increases implemented in recent years.

In terms of guidance, management is targeting a 3% increase in wireless revenue for the full year, with steady subscriber additions and higher average revenue per user (ARPU). The company also expects broadband revenue to exceed 7% in 2024, with AT&T's fiber being a key growth driver.

The ongoing transition from traditional cable to more modern broadband infrastructure has created a category of “converged customers” who use both fiber and wireless services. AT&T sees bundling its various services as a major opportunity for increased profitability through 2025 and beyond.

Why I'm optimistic about AT&T

Looking at AT&T as an investment opportunity today, my conclusion is that the company has regained its fundamental foundation. Perhaps the biggest improvement AT&T has experienced is the strengthening of its balance sheet. AT&T, which has long suffered from a high debt burden, is now managing to deleverage its debt, with net debt declining and positive free cash flow supporting this.

This momentum is good news for investors eyeing AT&T's 5.4% dividend yield, as confidence grows that the quarterly yield of $0.2775 per share is sustainable. With signs that the Federal Reserve may cut interest rates later this year, AT&T's industry leadership and high yield profile will look even more attractive.

One of the unique aspects of the telecommunications industry and the wireless business is its defensive positioning. For most people, a smartphone with wireless service and internet has become a necessity. This means that even in a scenario where economic conditions worsen, AT&T should continue to generate high-quality cash flows with stable earnings. This could make the stock a winner even in a volatile stock market environment.

I also like AT&T stock because of its compelling valuation, which is about 6.4 times management's 2024 adjusted EBITDA as a ratio of enterprise value to expected EBITDA. Notably, this value represents a discount to Verizon Communications traded with a multiple of 6.6 on the same key figure or T-MobileUS at 9.6. In my view, AT&T offers good value for money and there is hope that some expansion in the earnings premium could act as a catalyst for the stock.

T EV to EBITDA (Forward) data from YCharts.

My forecast for AT&T shares

I believe AT&T stock deserves more attention and can work for investors in a diversified portfolio. While it's unlikely to go straight up, there's a good chance shares will rise from here while compensating investors with a solid dividend yield. The company's ability to continue executing its strategy should reward shareholders over the long term.

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Dan Victor does not own any stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Is AT&T Stock a Buy Now? was originally published by The Motley Fool