Stocks to buy

Investors in AT&T (NYSE:T) stock are struggling to keep up with the changes in the company’s business, and the share price reflects their question marks.

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T stock is down about 5% in 2021. By comparison, the S&P 500 index is up over 19% so far in the year.

After trying to integrate media into its business model over the years, AT&T finally turned the tables by spinning off WarnerMedia in a deal with Discovery (NASDAQ:DISCA). The merger will finalize in 2022 and  trade under the new ticker symbol WBD.

AT&T shareholders have taken a major beating ever since the Time Warner acquisition. It was a bold move to buy Time Warner in 2018 for $85.4 billion. Now, since the most recent spinoff announcement in May, analysts have been debating how much AT&T stock may be worth after the deal is finalized next spring.

The spinoff is poised to make AT&T a pure-play telecommunications company once again. Management can now expand the 5G network while enhancing its fiber footprint in the industry. I believe this is good news for potential investors, especially given its current stock price.

Here’s why.

How Q2 Earnings Came

AT&T released robust second-quarter results in late July. It generated $44 billion in revenues, up 7.6% from a year ago. Adjusted EPS came at 89 cents, an increase of 7.2%. Free cash flow stood at $7 billion.

The company beat analyst wireless subscriber estimates by a wide margin. It registered a 1.16 million increase in its wireless customers. This figure was almost four times the consensus estimates and double the gains reported by Verizon (NYSE:VZ) during the same period. The company ended the quarter with 87.5 million subscribers, representing a 22% year-over-year increase.

In its media business, Warner Media also saw robust growth in revenues and subscribers. Advertising revenue went up by 49% and now has 67 million subscribers worldwide, with a forecast of 70 million to 73 million by year’s end.

While the communications segment is generally a slow-growth business, AT&T sees its 5G wireless offering as its primary growth engine going forward. The company is deploying $60 billion in 5G wireless and focusing on what management feels it does best.

A critical factor in soaring wireless additions has been lower subscriber churn driven by AT&T’s heavy promotions. While device promotions are generally limited to new customers, AT&T offers existing customers various deals as well. However, this approach has led to shrinking wireless margins for AT&T. In the long run, it may not be a sustainable strategy.

AT&T stock trades only at 8.9x forward earnings, compared to almost 57x for T-Mobile (NASDAQ:TMUS). Therefore, from a valuation standpoint, T shares deserve to be on your radar, too.

The Bottom Line on T Stock

Second-quarter earnings performance supports the bullish argument for T stock. The company is making significant progress in expanding its 5G network while also retaining 71% ownership of a valuable media asset.

AT&T will soon lose its dividend aristocrat status, as it will be cutting its dividend once the spinoff deal closes in mid-2022. The stock currently generates a 7.5% yield, one of the highest dividend yields in the S&P 500. Thus, a reduction in yield would not be as dramatic as it sounds. Income investors should also consider the potential for capital gains.

The spinoff decision will likely prove be a bullish move for AT&T. Given the significant upside potential of its 5G wireless business, the recent pullback in T stock may offer a unique buying opportunity for long-term investors.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.