AT&T (T) is the largest communications company in the world, providing a wide range of services, including wireless, broadband, and television, notes Ben Reynolds, growth and income expert and editor of Sure Retirement.

The company operates in three business units: AT&T Communications (providing mobile, broadband and video to over 100 million U.S. consumers and nearly 3 million businesses), WarnerMedia (including Turner, HBO, Warner Bros. and Xandr), and AT&T Latin America serving 11 countries.

AT&T has a competitive advantage with its entrenched position and immense scale. It is very difficult for a new telecom company to build a network with the necessary scale to compete with the established industry giants.

This gives AT&T a wide economic moat and a durable competitive advantage. During the last recession, AT&T posted results of $2.76, $2.16, $2.12 and $2.29 in earnings-per-share for the 2007 through 2010 period.

The company did not eclipse its pre-recession high on an earnings basis until 2016, but the dividend did continue to grow throughout the entire period. We expect AT&T to remain highly profitable during challenging times and continue to increase its dividend each year.

AT&T is a colossal business, generating profits of $20+ billion annually, but it is not a fast grower. That said, the company still has growth avenues available from its media content-driven by the $85 billion acquisition of Time Warner, which owns multiple media brands, including: TNT, TBS, CNN, and HBO.

In addition, the company is well positioned to take advantage of the 5G rollout. It also has the possibility of repurchasing shares as it gets its debt under control. The company expects free cash flow of at least $26 billion in 2021. We are forecasting 3% annual future EPS growth.

We expect AT&T to generate adjusted earnings-per-share of $3.20 in 2021. Based on this, shares are presently trading at a price-to-earnings ratio (P/E) of 9.3.

We view AT&T as undervalued, with a fair value P/E estimate of 11.0. Valuation expansion could add 3.5% per year to returns. Including the 7.0% dividend yield and 3% expected EPS growth, this implies a 11.8% annual total return.

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