With its massive 5G network ready to launch, AT&T (NYSE:T) will play a critical role in the latest tech revolution. T stock suffered for years as declining business lines and intense competition weighed on the equity.
But now with 5G wireless service beginning to appear, the company will play an increasingly critical role in the tech industry. So the rise of 5G combined with the low valuation of T stock could make AT&T stock compelling.
5G Outweighs the Negatives of T Stock
There are many reasons to avoid T stock. AT&T’s profit growth has remained mired in single-digit percentage levels for a long time. Even though the company’s prospects have improved, its profit growth will probably not accelerate.
Furthermore, T has become a poster child for declining industries such as landline telephones and cable television. Such challenges make it easy to see why T stock hasn’t climbed much in the 2010s.
AT&T has tried to improve its results by acquiring media content from companies such as Twenty-First Century Fox (NASDAQ:FOXA, NASDAQ:FOX). However, despite AT&T’s efforts, Disney (NYSE:DIS) will probably continue to hold the best content library.
It remains unclear whether AT&T can compete effectively in this area, let alone turn a profit. Moreover, AT&T has become the only major wireless company to aggressively pursue content.
Speaking of wireless companies, intense competition in the wireless sector has left AT&T with very low profit margins. To add insult to injury, to remain competitive in the sector, the company has had to spend tens of billions of dollars to build a 5G network.
However, 5G could also be the key to the revival of T stock. Since Sprint (NYSE:S) looks likely to buy T-Mobile (NASDAQ:TMUS), only AT&T, T-Mobile, and Verizon (NYSE:VZ) will own nationwide 5G networks after 5G goes mainstream. As a result, these companies will be the “new Big Three” of the wireless sector, as they power the latest revolution of the tech industry.
AT&T Stock’s High Dividend And Low Valuation Make It Attractive
Of this new Big Three, no other company looks more favorable to investors than AT&T. Its dividend is the most attractive aspect of the stock, at least for income-oriented investors. As expected, T just approved its 34th consecutive annual dividend hike, bringing next year’s annual payout to $2.04 per share and taking the yield above 7.2%.
AT&T is considered a “dividend aristocrat.” In order to be placed in the “dividend aristocrat” category, companies must have increased their payouts annually for at least 25 years. If a “dividend aristocrat” doesn’t increase its payout one year, its stock will drop sharply.
Given that situation and the company’s profit growth, the chances of AT&T raising its dividend each year are among the highest of any name in the stock market.
T stock should also at least be traded by growth investors. Due to the recent market selloff, the AT&T stock price has fallen below $30 per share. That has taken the company’s forward price-earnings ratio to around 8.2. Over the last five years, AT&T stock’s average PE ratio has been 17.6.
I do not think the PE ratio of T stock will ever be close to that of Netflix (NASDAQ:NFLX). However, once 5G takes off, I can see AT&T’s multiple returning to or even exceeding its own long-term averages.
Final Thoughts on AT&T Stock
The rise of 5G and T’s appealing valuation should revive interest in AT&T stock. AT&T is burdened with declining businesses and cutthroat competition from the wireless industry. For these reasons, one can see why T stock has not performed well over the last few years.
However, only AT&T and two other companies will enable the upcoming 5G revolution. Since AT&T will be a member of this new Big Three, its business will be stronger than at any point since its landline telephone monopoly fell apart.
Furthermore, the stock’s 7.2%+ dividend yield and forward PE of 8.2 give both income and growth investors incentives to buy T stock. For investors who want generous cash flows and a low multiple, few equities are better than AT&T stock.
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.