Where will AT&T be in 5 years?
Would it finally be AT&T‘s (NYSE: T) time? The telecommunications giant has spent several years and tens of billions of dollars to build a nationwide 5G network. Now, the decision of major smartphone makers to start selling 5G-capable phones will more than likely increase demand for 5G.
However, long-term holders saw little non-dividend gain in this telecom actions in decades. Therefore, the business might need more than the enormous potential of 5G to overcome this hurdle. Let’s take a closer look to see where AT & T’s stock is.
AT&T inventory stagnation
The present century has not treated AT&T stocks kindly. At around $ 29 per share, the stock is selling at levels first seen in 1995! Today, 20 years after the dot-com bubble burst, it is trading at about half of its peak during this boom.
So what happened? In 1995, the company derived most of its income from local monopolies in the field of fixed lines. However, since then AT&T has had to spend billions each year to keep up with the various changes in wireless and internet technology over the past quarter century.
The development of 5G, along with investments such as DirecTV and WarnerMedia, have contributed to long-term debt of over $ 153 billion. This is a huge burden on a company worth around $ 193 billion in equity, the amount left over after subtracting liabilities from assets.
It also had to compete to retain its wireless and Internet customers, especially with Verizon and T Mobile.
Yet, due to the enormous cost of building a nationwide 5G network, the three companies have now become an oligopoly. Additionally, despite its WarnerMedia and DirecTV assets, 5G is likely to become the primary driver of AT&T stock for the foreseeable future.
Will 5G put AT&T stock on the path to growth?
One question regarding this oligopoly is whether the price wars of the 3G and 4G eras will continue. The good news for AT&T is that this is less likely. T-Mobile, which led much of the price competition, also had to spend tens of billions of dollars to build its own 5G network and acquire Sprint. This leaves less room for T-Mobile or Verizon to attract customers with lower prices.
Additionally, 5G will achieve wireless speeds of up to 300 megabytes per second (Mbps), up from 12 to 36 Mbps in the 4G era.
We already know that 5G will improve technologies such as artificial intelligence, virtual reality and the Internet of Things. However, few have predicted that Apple iPhone would later spawn companies like Uber. Likewise, it’s unclear what technologies 5G will make possible. Yet none of these features are possible in the United States without turning to one of the three 5G providers. Therefore, we can assume that such innovations will likely benefit AT&T.
The case of AT&T
Additionally, while 5G is a relative disappointment, AT&T stock is expected to remain attractive to a specific category of investors. Thanks to a 35-year streak of dividend increases, AT&T’s annual payout of $ 2.08 per share is earning about 7%.
In addition, the stock Dividend Aristocrat the statute plays into the hands of income investors. Breaking a decades-long streak of payment hikes would likely be a blow to investor confidence. With AT&T stagnating over the past 25 years, it probably doesn’t want to upset its shareholders by losing its status as a dividend aristocrat.
In addition, he can afford this payment as well as subsequent increases. In the most recent quarter, AT&T generated approximately $ 7.59 billion in free cash flow, more than enough to cover the $ 3.74 billion in quarterly dividend costs. To ensure that it could continue the dividend, AT&T also discontinued share buybacks and borrowed additional funds earlier this year.
In addition, the forward P / E ratio is around nine. Still, net income fell in the last quarter and forecasted income growth for next year is 1.3%. This slow growth can negate any advantage of low valuation.
These benefits could increase as 5G increases the demand for broadband. Plus, with a high dividend yield set to rise further, the payout itself may become too generous for income-oriented investors to ignore.
In addition, activist investor Elliott Management put considerable pressure on the company to sell the money-losing DirecTV business. Such a sale could offer debt relief and higher earnings, making AT&T stocks more attractive.
AT&T may not look attractive from a growth perspective. Still, with its massive and growing dividend yield and 5G potential, it would be quite surprising if this stock didn’t trade significantly higher in five years.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.