Telecommunications giant AT&T (NYSE:T) When the company reported its first-quarter results on Wednesday, it slightly missed revenue and earnings expectations, but those headlines don’t tell the whole story. AT&T continued to add new wireless customers while churn remained at record lows, and its broadband business impressed.
AT&T generated free cash flow of $3.1 billion in the first quarter and maintained its guidance, which called for full-year free cash flow of between $17 billion and $18 billion. With the stock trading for less than seven times the midpoint of that range, investors are getting an incredible bargain.
Wireless swing
While overall mobility revenue stagnated in the first quarter, a decline in equipment sales was solely responsible. Mobility services revenue increased 3.3% year-over-year, driven by AT&T’s solid subscriber gains and rising revenue per user.
AT&T reported 349,000 net postpaid phone additions in the first quarter, while postpaid churn fell to a record low of 0.72%. The company now has 71.6 million postpaid phone customers, and each of them spends an average of $55.57 per month. Average revenue per user increased 0.9% year over year in the first quarter.
AT&T’s results are in stark contrast to those of Verizon. Verizon reported a net decline of 158,000 postpaid phone customers in the first quarter. Verizon has lost subscribers in four of the last five quarters.
For the full year, AT&T expects wireless revenue to increase about 3%.
A two-pronged approach to broadband
AT&T’s legacy landline business is in steady decline. While AT&T is struggling to offset this decline in revenue from business customers, the company is doing much better on the consumer side.
Residential fixed line revenue was $3.4 billion in the first quarter, up from $3.2 billion in the same period last year. Broadband services generated revenue of $2.7 billion, an increase of 7.7% year-on-year.
Demand for AT&T’s legacy broadband services is declining, but the company’s fiber-optic Internet service is offsetting demand. Fiber optic revenue rose 19.5% in the first quarter as AT&T added 252,000 net subscribers. Fiber now accounts for the majority of AT&T’s residential broadband sales.
AT&T also has no problem raising prices. Average revenue per user in the consumer fiber business increased 4.1% to $68.61, and revenue ARPU is now above $70.
Beyond fiber, AT&T has also moved into the landline business with its Internet Air service. Other telecom giants are betting more heavily on using their 5G networks to provide home internet, while AT&T is using the service to fill gaps in its fiber optic network. Internet Air added 110,000 subscribers in the first quarter, a solid result for a company that launched in select regions in August last year.
Way too much pessimism
AT&T’s results in both its wireless and broadband businesses will fluctuate and fluctuate with the economy. The company also has a highly leveraged balance sheet, which may give some investors pause. However, the stock seems to be priced for disaster, which makes little sense to me.
AT&T’s dividend is also attractive and not only sustainable. The stock currently yields about 6.6%, and the dividend will eat up just 46% of free cash flow this year, based on the midpoint of the company’s guidance. This leaves a lot left for debt reduction.
AT&T stock is up 25% from its 52-week low, but there’s plenty more upside if the company can continue to deliver solid results.
Should you invest $1,000 in AT&T now?
Before you buy AT&T stock, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and AT&T wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $506,291!*
Stock Advisor provides investors with an easy-to-follow roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns from April 22, 2024
Timothy Green holds positions at AT&T. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
“It’s Time to Buy AT&T Stock Hand Over Fist” was originally published by The Motley Fool