Telecommunications and media giant AT&T (T) stock is trading close to its 52-week high, and it continues to look strong. It met its first-quarter earnings estimates despite subscriber losses during the quarter. AT&T stock looks relatively cheap from a valuation standpoint, and it still seems to have a long way to go.
AT&T is currently trading at nine times its estimated earnings for the next 12 months. That might look unattractive for a company that’s estimated to grow just 1% or 2% for the next few years. However, AT&T stock seems alluring compared to its historical average. Its five-year historical average PE is close to 17x. Its stock looks cheaper than the broader markets, which are valued at around 17x.
In comparison, T-Mobile (TMUS) stock is currently trading at 17 times its forward earnings. Compared to AT&T, T-Mobile has a much lower market share and a significantly lower market cap. AT&T stock has surged more than 16%, while T-Mobile is up about 23% so far this year. Both form approximately 5% each in the iShares US Telecommunications ETF (IYZ). The long-awaited T-Mobile–Sprint (S) merger continues to drag on more than a year after the announcement. Read The T-Mobile–Sprint Merger Faces New Challenges for more info.
AT&T stock offers stable dividends
The company’s slow expected earnings growth might concern investors. AT&T stock is currently trading at a dividend yield of 6%, higher than its historical average. It also represents a yield premium of more than 400 basis points compared to the broader markets and the ten-year Treasury yield. It’s increased its quarterly dividend for the last 35 consecutive years, indicating stability and reliability. It pays a large portion of its earnings in the form of dividends. For 2019, AT&T’s payout ratio based on estimated earnings will likely be around 58%, lower than its historical average. T-Mobile and Sprint don’t pay dividends.
AT&T’s strong growth prospects
AT&T’s huge pile of debt after the Time Warner (TWX) acquisition was a big worry for its investors. But the company significantly reduced its net debt to $162.0 billion at the end of the second quarter compared to its debt level of $180.0 billion when it completed the acquisition last year. Its net debt-to-EBITDA ratio, which indicates how many years a company will take to repay debt, was 2.7x, close to its five-year average. T-Mobile’s net debt-to-EBITDA ratio came in at 2.4x as per its recent company filings.
With its TWX acquisition last year, AT&T looks well placed to overcome trivial growth opportunities in its telecommunications business over the long term. It generates approximately three-quarters of its revenue from the telecommunications business. In the second quarter, its revenue from WarnerMedia came in at $8.4 billion, flattish compared to the first quarter. The segment will likely continue its digital subscriber growth given its popular content, which could bode well for its earnings growth in the long term. With AT&T trying to gain market share, the video streaming war will likely get more frantic going forward.