AT&T (T, Financial) is a stock that has faced much scrutiny this year amid upcoming debt restructuring costs and its aggressive spending on 5G. However, I'm bullish on the stock due to the current market climate and the company's dedication to granting shareholder returns, which will make it attractive to hold even in a higher-yield environment.
Interest rates expected to rise
The recent rise in the longer-term U.S. bond yields due to implied higher interest rates could strengthen the bond market and subdue the equity market.
In this environmnet, the stocks that investors will still enjoy being invested in will most likely be high-paying dividend stocks in more traditional sectors rather than innovative industries where costs of capital still remain high and exceptionally sensitive to changes in debt financing costs.
AT&T undeniably has a lot of debt, which will serve as a headwind as interest rates rise, but overall, I think its well-established, recession-proof business will render this problem inconsequential.
Dividend and value
AT&T is known as the Mecca of dividend stocks. It's a dividend aristocrat with a yield of 7.59% and 37 consecutive years of dividend payout growth. AT&T is thus one of the stocks that might be appealing to most equity investors over the next three years or so as interest rates rise higher. Even if its stock price fluctuates wildly, it will be more than worth it to hold it for the dividend over the next 10+ years.
Looking at the past year's results, AT&T produced an Ebitda margin of 30% and a levered free cash flow margin of 16.26%, beating sector medians by 20.98% and 11.37%, respectively. Thus, AT&T is in good shape to continue providing shareholders with solid compensation for the time being. The stock also trades with a price-earnings ratio that is lower than 56.99% of industry peers, and its price-sales and enterprise-value-to-Ebitda ratios are also trading at discounts of 37.45% and 21.21% to their respective industry averages.
Bullish calls on Wall Street
Wall Street remains bullish on AT&T, with Deutsche Bank's (XTER:DBK, Financial) Bryan Kraft thinking the stock could reach the $37 level. Citigroup's (C, Financial) Michael Rollins thinks the stock will rise and has set a $32 12-month price target.
Final word
I think AT&T's stock is very suitable for the current market environment and will most likely outperform the index after a period of stale returns. Drivers behind my optimism are strong dividends, encouraging the growth of key income and cash flow metrics and Wall Street's bullish outlook.
