With surging interest rates and the fall of SVB Financial's (SIVB) Silicon Valley Bank pushing for that risk-off mentality again, many investors may have the incentive to give the fallen value plays another look. Many of the sagging "deep value" stocks such as telecom titan AT&T (T, Financial) may have baggage, but it's hard to ignore their swelling dividend yields.
Indeed, 2023 is likely to be yet another volatile year. Inflation reports will dictate which direction markets head in. With the S&P 500 stuck in a range just south of 4,000, I do think investors had better be prepared for an environment where markets ultimately go nowhere.
Sure, we have some bears that foresee a sharp move lower. At the same time, we've got bulls like Fundstrat's Tom Lee, who's not about to go bearish anytime soon, even with the new risks introduced to the banking scene over the past two weeks. As always, timing the markets is a hard game, and it's unadvisable to make moves based on any one opinion of a raging bull or bear. If markets do flatline, I'd argue it's wise to at least get paid a dividend for riding the market's emotional ups and downs.
It's not all about the yield
A larger yield isn't always superior. Even if a dividend is comfortably covered by a company's operating cash flows in a turbulent year for the economy, investors need to pay attention to the magnitude of capital gains or losses to be had.
At the end of the day, total return (dividends and capital gains) potential matters more than just the size of a dividend yield. As such, it's always a good idea to carefully evaluate a company's abilities to power some sort of growth.
There are a lot of "broken" stocks out there that sport incredibly high dividend yields (think more than 7%). However, many of them could be destined to lackluster results for a long time. Weak results means a lack of capital gains, and, perhaps, capital losses. Indeed, it doesn't make a lot of sense to collect a 7% yield if you're going to suffer more than 7% in capital losses per year!
This is why I like AT&T - its appeal is not just about the dividend yield of 6.07%. It's a long-time underperformer that's delivered some weak total returns over the past five years, but it has a brighter road ahead of it. In the last five years, shares are down just shy of 30%. The dividend has helped reduce the bleeding on the front of total returns. However, I think it's safe to say that income investors may be less than satisfied with the road behind it.
The road ahead seems brighter
Just because AT&T has underwhelmed in recent years doesn't mean it's destined to continue doing so. The telecom behemoth has changed a lot over the years. It's leaned out, ridding itself of media assets and has positioned itself to better compete with the top players in the U.S. telecom scene.
Looking back, I think it's safe to say that AT&T got a bit too bloated. Nowadays, though, the company seems to be on the right track. And I do think the old dog can learn new tricks as it looks to make the most of the U.S.' ongoing 5G infrastructure rollout.
Undoubtedly, 5G is not new anymore. It's become standard for many mobile users. But it still hasn't lived up to its full potential, in my opinion. Remember when consumers were excited over the new potential applications of 5G? The speedier, low-latency and more reliable wireless tech was to pave the way for Internet-of-Things (IoT), autonomous vehicles (AVs), the Metaverse and more. As such technologies (the Metaverse especially) strengthen over the next decade, demand for top-tier 5G signals across the nation is likely to keep surging.
AT&T will play a critical role in the meeting said demand. As market uncertainty takes it up a notch, I think AT&T is increasingly intriguing. Sure, recession will weigh on subscriber growth. However, I'm a fan of the company's competitive position versus rivals. Further, the low 0.77 beta and 6%+ dividend yield should help investors weather any potential recessionary storm.
Final thoughts and valuation on AT&T stock
AT&T stock is now up around 23% from its 2022 lows. I think the stock can continue to gain traction as more investors opt for value and yield. The stock trades at 7.72 times forward earnings estimates and 1.37 times book value. These are very modest multiples for a company that's shown it can put up a fight in a competitive industry.
Rivals may have weighed on fourth-quarter results, but AT&T is very much equipped to play the long game in my view. In the meantime, management is guiding for slower wireless customer growth for 2023, showing realistic expectations. However, the company does hope to gain market share. With such a low bar set by management, I think AT&T could delight investors as it continues aggressively putting up capital to improve its network. AT&T will take a while to pan out, but the dividend yield should be enticing enough to be patient.