AT&T (T) had a streak of 36 consecutive annual dividend increases that ended in conjunction with its spinoff of the Warner business, and its desire to pay down debt, notes Ben Reynolds, growth and income specialist and editor of Sure Dividend.

AT&T reported financial results for the third quarter of fiscal 2023 in October; the company grew its revenue 1% over the prior year’s quarter thanks to strong customer additions across its growing 5G wireless and fiber networks.

AT&T is investing in the expansion of its 5G and fiber networks at a record pace. It posted 296,000 fiber net additions, which makes more than 200,000 additions per quarter for 15 consecutive quarters. It also posted 468,000 postpaid phone net additions.

Adjusted earnings-per-share declined 6%, from $0.68 to $0.64, but free cash flow grew from $3.9 billion to $5.2 billion and AT&T raised its guidance for annual free cash flow from at least $16 billion to about $16.5 billion.

Management also stated that it expects adjusted earnings-per-share towards the upper limit of its previous guidance of $2.35-$2.45 in 2023. Management has repeatedly proved conservative and AT&T has beaten the analysts’ estimates for 12 consecutive quarters.

Competitive Advantages & Recession Performance

AT&T’s competitive advantage is one of size and scale. AT&T operates what amounts to a "triopoly" in the mobile phone segment in the U.S., and it is heavily entrenched in that business among consumers and businesses alike. In addition, AT&T is investing heavily in 5G infrastructure upgrades. We consider AT&T’s business to have such an advantage that it is akin to a utility in that respect.

Given this, we also believe its recession resistance will remain quite high. Mobile phone and internet service are necessities and therefore, we do not believe material weakness would befall AT&T in a recession.

Growth Prospects, Valuation & Catalyst

We forecast growth at 2% going forward, which should be driven by increased subscribers in the wireless and internet service businesses, somewhat offset by relatively weak profit margins and high interest expense from sizable debt. Management has been gradually chipping away at its debt, which should boost margins over time through lower interest expense.

The company has an average price-to-earnings ratio of just over 11 in the past decade, and we assess fair value at 10 times earnings. Shares trade for 6.7 times earnings, meaning we expect to see a potential 8.2% annual tailwind to total returns over the next 5 years, should the valuation normalize over that time. Shares yield 6.9%, and with 2% growth, we project 14.9% total annual returns.

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