Hey everyone! I've been looking at AT&T as a dividend opportunity and decided to share my research with you so, without further ado… Behold! AT&T. A stock with history and a stock that has been through a lot. You don't see a lot of companies that hit their all-time highs 24 years ago and are still trading at half price apart from Intel, maybe (they've been having a rough patch, too). Now, I last talked about AT&T over a year ago and I didn't really have a lot of nice things to say about it back then, but has the outlook for AT&T changed in 2023? Well, let's see!

Operations

First of all, AT&T's operations are showing growth in numbers. The telecom company added 2.9 million postpaid wireless subscriptions, 280 thousand fiber net subscription marking the 12th consecutive quarter of more than 200 thousand additions! In terms of 5G, AT&T now covers 150 million people, too! Overall, these are very solid results and better than what analysts and AT&T's management expected.

Profits

What about revenue, earnings and all that? In 2023, AT&T brought in 120.7 billion dollars in revenue and adjusted earnings per share were 2.57 dollars. Reported EPS was actually negative 1.1 dollars, but that was due to non-cash charges, mainly around impairments. AT&T's free cash flow was a 14.1 billion dollars which is okay, but it's not great by any means. The management's forward guidance was also decent. The expectations for 2023 are growth in wireless and broadband of 4% or more, capital investments of about 24 billion dollars, similar to 2022, free cash flow of 16 billion dollars or better which is an expected increase of 12% although AT&T does expect to see a slight drop in earnings per share.

Overall, AT&T performed well in 2022 and is expecting slow, but steady growth in 2023. On the good side, it seems that the Warner Media spin off has not impacted AT&T's business in the way I thought it would. The operations are looking leaner. After we exclude the non-cash impairments, operating expenses in Q4 have actually dropped a bit from 26.2 billion in the year-ago quarter to 25.8 in this quarter. However, there are two big risk considerations here.

The Two Main Risks

First of all, the free cash flow. We are seeing a pretty significant drop from previous years due to the Warner Media spin off. Less free cash flow means less security when it comes to dividend. It also means less money left over for capital investments. Overall, less free cash flow equals lower chances of growth and less money being returned to shareholders. At the end of the day, as investors, we want to make a profit and seeing this drop with AT&T is expected, but still worrying. That is definitely something to keep an eye on. The good thing is that, like we saw, management expects higher free cash flow in 2023, but that is still just an expectation and not a fact.

The second and much bigger problem I'm seeing is debt. I've never been a fan of companies that rely too much on debt and have a high leverage. I understand why they would do that and with the extremely low interest rates of the last 10 to 12 years, it makes absolute sense. However, it does make a company more fragile and more susceptible during tough economic conditions. Historically, telecomms have been hit harder during recessions, too, which means that AT&T is not really well-positioned for the upcoming year in my opinion. As of the end of the 2022 financial year, AT&T has $135.9 billion dollars in debt. That's a lot considering their equity was 122.4 billion at the end of the third quarter! Their interest payments for 2021 were 7.67 billion dollars. It is looking like the 2022 interest payments will be similar, but given the rising interest rates, it is only a matter of time before the increased interest payments start weighing down on AT&T.

Valuation

Now, these are two big issues that AT&T desperately needs to work on to get their business in order. However, does AT&T's current price and dividend justify the risk? Let's take a look. I'll be looking at the adjusted ratios because they reflect the underlying business better. AT&T's trailing adjusted PE ratio is only 6.7 and their forward adjusted PE ratio is 7.4. Historically, these are a bit lower since the 5-year average for AT&T stands at 8.7 and 8.9 respectively. However, let's look at their main competitors, Verizon and T-Mobile. Verizon has PE ratios of 7.8 and 8.2 respectively, whereas T-Mobile stands at 21.7 and 66.8 although T-Mobile really has a much different business model and focuses on growth without paying a dividend. In terms of forward price-to-cash-flow, AT&T has the lowest at 4 versus Verizon's 4.5 and T-Mobile's 11.1. It is also lower than it's 5-year historical average which stands at 4.6. Finally, AT&T is again cheapest when it comes to price-to-book with only 1.1 versus 1.7 for Verizon and 2.6 for T-Mobile and historical average of 1.2. Overall, we can see that AT&T is trading at some discount to both its historical performance and its competitors so there is some compensation for the risks that I've outlined above.

Dividend

Finally, the dividend is one of the biggest arguments for AT&T. Despite the recent dividend cut, AT&T still yields about 5.8% which is a very decent yield. Unfortunately, it is below Verizon's 6.5% yield and below the 5-year historical AT&T average of 6.6%. The payout ratio is similar to Verizon's as both companies have between 45 to 50% there. Plus, chances are AT&T will not raise its dividend until its financials have become improved while Verizon has been showing a slow, but steady annualized dividend growth of 2.5% over the last 10 years.

Conclusion

So, what's my final take on AT&T? Honestly, it's hard to see a strong bullish case for the company. Best case scenario, the AT&T stock is a weak buy simply because it has some turnaround potential. However, I personally would not make it a big bet given that I'm not expecting a very rosy economic outlook ahead. In fact, I would avoid both AT&T and Verizon and instead simply buy some of the Charles Schwab's Dividend Equity ETF. It's a lot more reliable and, while it has a much lower dividend yield, it offers a much better total return in my opinion while being exposed to a lot less risk. I may consider buying AT&T if and only if the price drops further down, maybe about $16. Remember, AT&T is a company that hits its all-time high 24 years ago and is heading into a possible recession with a massive debt burden. There are simply better options on the market.

If I've made an obvious mistake, let me know, please. I'd also love to hear your opinion – what do you think about AT&T (or Verizon) right now?