Is AT&T Stock a Buy Now?

Source The Motley Fool

Shares of veteran telecom company AT&T (NYSE: T) saw a resurgence in recent months. The stock hit a 52-week high of $27.97 on March 4, the highest it's been in years, and is up more than 50% over the past 12 months through March 5.

This significant milestone reflects the company's progress in its multiyear transformation under CEO John Stankey. He took over the top spot in the summer of 2020 after the previous CEO's multibillion-dollar purchase of entertainment businesses drowned AT&T in massive debt.

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Does the stock's current surge suggest now is the time to grab shares in the reinvigorated AT&T? To get to an answer, here's a dive into the telecom giant to determine if it's a worthwhile investment for the long haul.

AT&T's revival

AT&T came a long way thanks to Stankey's leadership. He brought renewed focus to its telecom business and improved the firm's financial health. Under his tenure, AT&T shed billions of dollars' worth of entertainment assets, although it still owns a 70% stake in DirecTV that will be divested by the middle of this year.

As a result of efforts under Stankey, AT&T's net debt-to-adjusted EBITDA ratio is on track to reach the 2.5x range in the first half of 2025, which finally will bring its debt load to a manageable level. The company exited 2024 with total debt of $123.5 billion, down from $137.3 billion at the end of 2023.

Along with its progress on debt, AT&T's rising revenue is another indicator that its turnaround efforts are bearing fruit. The firm exited the fourth quarter with $32.3 billion in revenue, up 1% year over year thanks to growth in mobile service and equipment sales.

After announcing fourth-quarter earnings, Stankey stated, "The strong results this quarter are the result of a four-plus-year period of hard work and consistent execution by our teams, which has positioned us well for a new era of growth."

AT&T forecasts years of business success

AT&T CFO Pascal Desroches put numbers to this "new era of growth." He indicated the company's mobile service revenue is expected to rise by 2% to 3% per year through 2027. The mobile service segment contributed $16.6 billion of AT&T's $32.3 billion in Q4 revenue, making it a critical part of its business.

Moreover, the firm's full-year adjusted earnings per share (EPS) is expected to reach between $1.97 and $2.07 in 2025, and likely will see a double-digit percentage increase by 2027. EPS in 2024 was $1.95 after subtracting income from DirecTV. Excluding DirecTV provides a clear picture of what the financials will look like after AT&T divests this asset.

Rising EPS is good for shareholders, and so is the company's anticipated growth in free cash flow (FCF). FCF is projected to increase by $1 billion annually through 2027. FCF in 2024 was $15.3 billion, excluding DirecTV.

FCF is a key metric in evaluating AT&T's attractiveness as an investment, because it provides insight into the cash available to invest in the business, pay debt obligations, repurchase shares, and fund dividends. With FCF expected to grow for the next three years, coupled with rising revenue and declining debt, it's no wonder the company's stock has risen.

Deciding whether or not to purchase AT&T shares

AT&T's performance exiting 2024 and its anticipated business growth through 2027 means its stock looks like a promising long-term investment. Add to this its robust dividend, which is yielding over 4% at the time of writing, and shares are a respectable pick for income investors.

But with AT&T reaching a 52-week high recently, is now a good time to buy, or is the stock too pricey? The forward price-to-earnings (P/E) ratio can provide insight here. This metric tells you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months, and is a common gauge for stock valuation.

T PE Ratio (Forward) Chart

Data by YCharts.

Comparing AT&T to its main rivals reveals its shares are a better value than T-Mobile, but are a bit pricier than Verizon. A year ago, AT&T stock looked undervalued versus the competition, but its recent share price rise changed that.

Even so, AT&T stock still looks reasonably valued given its forward P/E multiple of about 12. This makes now a good time to pick up shares. Holding on to the stock over the long term will produce passive income from dividends, while its share price looks to benefit from AT&T's strengthening financials and continued growth in its telecom business.

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Robert Izquierdo has positions in AT&T, T-Mobile US, and Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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