At first glance, investors may not understand why AT&T (NYSE:T) stock trades at levels it reached in 1997. The forward price-earnings of T stock stands at only 9.4 and it has a high dividend yield of about 6%.
However, traders may remain on the sidelines for one big reason: AT&T. Specifically, tough price competition in wireless and cord-cutting have hurt T stock. Other negative catalysts for AT&T stock have included high spending on video content and the construction of a 5G network, which is quite expensive.
Still, 5G smartphones will hit the market soon. Once consumers begin to adopt this technology, T stock price may finally embark on a sustained rally for the first time in years.
The Long-Term Outlook of T stock Is Upbeat
I have been bullish on AT&T stock for a long time. As I stated in an earlier article, AT&T, along with Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS), will form a “wireless big three” as consumers and businesses adopt 5G. Emerging technologies such as artificial intelligence (AI) and The Internet of Things (IoT) cannot reach their full potential without 5G. Given the enormous cost of building a nationwide 5G network, other potential competitors will likely avoid entering the space. As a result, AT&T, Verizon and T-Mobile will wield considerable pricing power.
However, that’s a good reason to buy T stock and hold it for the long-term. The short-term outlook of AT&T stock is a different story.
AT&T Continues to Hamper AT&T Stock
I still believe AT&T has fought too hard to resist the cord-cutting trend. Consumers grew weary of $100-plus per month cable TV bills and the proliferation of unattractive channels. Let’s be honest; consumers do not want 24-hour channels devoted to obscure topics like farm news or underwater basket weaving. That pricey model makes no sense in a world of on-demand streaming.
AT&T eventually came to this conclusion and took on huge debts to acquire content providers such as HBO, Turner Cable, and Warner Bros. studios at a considerable cost. The company put these companies together to form WarnerMedia, a streaming service that could recruit a substantial number of subscribers.
However, despite AT&T’s investment, its video revenues will not match the levels they reached during the heyday of pay-TV. Moreover, content spending and the 5G buildout have left AT&T with a debt burden that stood at $157.79 billion as of the end of the second quarter. Since AT&T’s equity stood at $194 billion at the end of Q2, one can see why many owners of T stock have become uncomfortable with its balance sheet.
The Dividend Makes T Stock Attractive
Nonetheless, investors can benefit from the annual dividend of $2.04 per share of T stock, which comes to a yield of 6%. AT&T has increased its payout for 34 straight years. Consequently, ending the streak would show a lack of confidence and hurt T stock for years to come. So even if investors don’t expect AT&T stock price to rise much in the short-term, they can still earn substantial cash while they wait for the company to turn itself around.
Moreover, I think the stagnation of T stock, which has lasted for nearly a decade, may end soon. Its long-term debt fell by more than $6 billion in Q2. Furthermore, 5G will almost certainly bring better pricing power than 4G.
Additionally, price competition from T-Mobile, which has forced AT&T and Verizon to cut prices in recent years, should subside. Given the cost of building a 5G network and acquiring Sprint (NYSE:S), T-Mobile will likely not be able to start another price war.
Concluding Thoughts on T Stock
AT&T stock price appears poised to move higher as the 5G rollout begins. T stock has remained rangebound for years as the company’s revenues fell and its costs increased. The cost of the dividend has put the company in a difficult position.
However, the 5G network that burdened the company for years may soon give AT&T a level of pricing power not seen since its days as a monopoly. Moreover, even if T stock stagnates in the near-term, investors can collect a generous, increasing dividend.
The company’s high debt levels and the questionable nature of its content strategy indicate that some of its decisions have been suspect. However, with 5G coming soon, the current AT&T stock price may look like a huge bargain in retrospect.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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