Investors have enjoyed some generous returns so far in 2023, with the S&P 500 up 17% and the tech-heavy Nasdaq up 31% as of this writing. Given these returns, investor expectations have been sky-high over the past few weeks as several companies reported earnings.
When it comes to the tech sector in particular, one general theme has been that stocks went down after earnings despite pretty solid reports. My take on this dynamic is that investors in these stocks are simply taking a breather before the second half of the year goes into full swing.
One stock on my radar is AT&T (T -0.06%), which has dropped 20% so far in 2023. Although AT&T is not a high-flying software business, the stock's current trading levels have caught my attention. Let's dig into the fundamentals of the business and see how AT&T stacks up against a rival. After analyzing its underlying financial position, investors may come to see why now may be a great opportunity to scoop up shares of this stock
Stacking up against the competition
Telecommunications is not a sector I cover frequently, but AT&T caught my attention following its second-quarter earnings report on July 26. While revenue only increased about 1% year over year in the quarter, there's more than meets the eye.
For the period ended June 30, AT&T reported 0.8% churn in its postpaid phone business. The company added 326,000 net subscribers to its postpaid business during the quarter. In comparison, Verizon has lost subscribers in its postpaid phone business in four of the last five quarters.
AT&T's quarterly presentation for investors also highlighted how its average revenue per user in both its postpaid phone and fiber segments has steadily increased. But it was the cash-flow profile that really got me interested.
Cash flow is king
For the period ended June 30, AT&T tripled its free cash flow year over year, reporting $4.2 billion. Management believes that the company will be able to generate $16 billion or more in free cash flow by year-end.
This cash flow generation is important partly because it will allow AT&T to continue cleaning up its balance sheet and reducing net debt. While it has reduced net debt by $20 billion over the last three years, it plans to further cut another $4 billion in the second half of the year.
Consistent cash flow and balance sheet optimization could also spell good things for AT&T's dividend, which currently yields nearly 8%.
Many investors are looking for passive income
When it comes to the broader macroeconomic environment, inflation is a variable that remains top of mind for both investors and management teams. While inflation is cooling, it still remains higher than the Federal Reserve's long-term target of 2%. Moreover, concerns linger over a more pronounced economic slowdown or recession.
Given the number of question marks, investors may want to look outside of volatile growth stocks and give some consideration to a business such as AT&T, which offers the obvious benefit of providing investors with dividend income. However, investors should keep in mind that while the company has recently kept its quarterly dividend at around $0.28 per share, this came after a cut of nearly 50% in early 2022.
A key question for investors is whether the dividend is safe. During the company's earnings call last month, CFO Pascal Desroches said, "going forward, from now until the first half of 2025, we expect to increasingly use our free cash flows after dividend to reduce debt, and at a faster pace."
While this statement from management is encouraging, investors should be realistic. AT&T has a long road ahead and its Q2 results should not be taken as an indication of future results. Nonetheless, the company appears to be outperforming its competition while also remaining committed to improving its liquidity profile without sacrificing the dividend. Should management successfully execute on this vision, there is a possibility that the dividend payout could increase in the future.
The chart above shows that AT&T stock has been beaten down quite a bit so far in 2023. The drop in price has helped push the company's dividend yield up and conditions are ripe to send investors looking for the passive income dividends provide. Given the stock's sell-off, AT&T shares may be worth a second look.
