Buy This Beaten-Down High-Yield Dividend Stock Before It’s Too Late

The stock market has slowly started to come to its senses about telecom giant AT&T (T 0.06%). While the stock is still down significantly from its all-time high, shares have surged around 25% since they bottomed out in mid-2023.

Still dirt cheap

Even after this rally, it’s clear that a cloud of pessimism continues to hover over the stock. AT&T has a market capitalization of around $120 billion, and the company expects to generate between $17 billion and $18 billion of free cash flow this year. At the midpoint of that range, AT&T stock trades for less than 7 times free cash flow.

The stock also looks inexpensive based on earnings. AT&T expects to report adjusted earnings per share between $2.15 and $2.25 in 2024, a number that will be reduced by an increase in depreciation and a few other items. The company’s decision to invest $14 billion in Open RAN technology meant to transform its network requires it to depreciate existing equipment at a quicker rate, which will hurt earnings through 2026. Even so, AT&T stock trades for less than 8 times the midpoint of its adjusted earnings guidance.

Two potential headwinds

There are a couple of issues that may be giving investors pause. First, the company is exposed to an unknown liability stemming from an investigation into lead-covered cables owned by telecom companies.

AT&T has downplayed any health risks, saying that lead-clad cables represent less than 10% of its copper footprint, with the majority either buried or in conduit. The company also said it conducted testing at sites originally identified by The Wall Street Journal and found no public health risk. Still, if the company is required to eventually take action to mitigate risk, it would likely be an expensive affair that would hurt the bottom line.

Second, AT&T suffered a reputational blow in February when its network went down for a large number of its customers. This outage stemmed from a network upgrade gone wrong, and the company offered a small account credit to those affected. AT&T reiterated its financial guidance in the wake of this outage, but it’s unclear whether there will be an impact on wireless subscriber growth or if there will be fines from regulatory agencies.

A sky-high dividend makes AT&T stock a buy

While there’s some uncertainty still hanging over AT&T stock, a beaten-down valuation coupled with a lofty dividend make the stock an easy buy for value and dividend investors alike.

AT&T pays a quarterly dividend of $0.2775 per share. While the dividend hasn’t seen an increase since before the pandemic, the lack of dividend growth is offset by a high yield. AT&T stock sports a dividend yield of about 6.6% at the current price.

Importantly, this generous dividend is well covered by the company’s free cash flow. Based on the share count at the end of 2023, AT&T will pay out just below $8 billion in dividends this year. Dividends will eat up less than 50% of free cash flow if the company hits its guidance.

Dividend growth will likely be slow or nonexistent for AT&T as the company prioritizes investing in its wireless and fiber networks as well as reducing its debt. Buy paying less than 7 times free cash flow for a dividend stock that sustainably yields more than 6% seems like a great deal.

It may take time for the market to award AT&T stock a less pessimistic valuation, but the dividend makes it worth the wait.