AT&T is focused on its future.
AT&T stock (T -0.41%) rose 10.6% in September, according to data provided by S&P Global Market Intelligence. Several factors have caused this rise. AT&T has agreed to sell its remaining stake in DirecTV to its partners. The company also provided investors with an optimistic outlook on its future prospects.
Let’s take a closer look at why these catalysts pushed telecom stocks higher last month.
Its future is coming into sharper focus
After much speculation, AT&T has announced that it has agreed to sell its remaining shares in DirecTV to its partner TPG. The company expects to receive a cash payment of approximately $7.6 billion for a 70% interest in the satellite television provider. The transaction is expected to close in the second half of next year. However, cash payments will be received in stages until 2029.
The sale paves the way for DirecTV to acquire Dish from owner Echostar. The company is paying Dish just $1 and is assuming $9.8 billion of Dish’s debt. Meanwhile, the deal will strengthen AT&T’s balance sheet and allow it to focus on growing its fiber and wireless businesses.
AT&T is very optimistic about the future of these businesses. CEO John Stankey spoke at a Goldman Sachs conference last month. He noted that the company’s wireless business is healthy and performing well. Meanwhile, he said its fiber penetration rate continues to exceed initial base case expectations. The company’s strong performance puts it on track to meet its 2024 financial guidance. Additionally, the company is on pace to achieve its leverage ratio target of approximately 2.5x in the first half of next year, and that’s before the impact of the DirecTV sale.
Goldman Sachs analysts named AT&T one of the top buys in the communications sector last month after positive comments about the company’s prospects. The investment bank believes that given the improved leverage ratio, the company’s earnings will improve in the future and it may initiate share buybacks.
Is AT&T a buy after last month’s surge?
Last month’s gains have pushed AT&T stock up more than 30% this year. This surge has lowered the company’s dividend yield to about 5%, which is still quite attractive considering the S&P 500 yields less than 1.5%. With its improved balance sheet, AT&T may soon begin returning additional cash to shareholders through dividend increases and a stock repurchase program. Given AT&T’s very low valuation, a stock buyback could be a good use of capital. Even after the surge, the company trades at less than 10 times forward earnings, which is more than 50% cheaper than the S&P 500. But while AT&T has many attractive qualities, it’s not the best telecommunications stock to buy for income. Right now.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has a position in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
