The telecom giant’s high yield appears sustainable, which should attract investors as interest rates come down.
High-yield dividend stocks often rally in response to interest-rate cuts. This relationship stems from investors seeking higher returns as yields on fixed-income securities decline.
With the Federal Reserve expected to enter a long-tailed rate-cutting cycle, dividend-paying stocks with yields above the 3% mark are under the spotlight. For instance, AT&T (T -1.70%), a longtime favorite among income investors, has seen its stock surge approximately 30% year to date, outpacing the benchmark S&P 500.
This significant price movement has altered AT&T’s investment profile since the start of the year. While the stock’s yield has decreased modestly, its valuation has risen sharply. Let’s examine if AT&T stock is still a top high-yield play after its hefty run-up in 2024.
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Telecom titan with a tempting yield
AT&T’s 5.1% dividend yield towers over its peer-group average of 3.92%. The telecom’s dividend-paying peer group consists of Verizon Communications, T-Mobile, and Comcast.
On the flip side, AT&T’s payout ratio stands at 63.7%, considerably higher than the peer average of 55.1%. This elevated payout ratio suggests AT&T is dedicating a significant portion of its earnings to dividends.
However, it’s important to note that the telecom company’s payout ratio falls well short of the 75% threshold. Historically, exceeding this threshold has been a red flag for dividend growth and often precedes reductions to the payout. In other words, AT&T’s sizable yield appears sustainable, even in a slowing economy.
A leveraged balance sheet raises eyebrows
AT&T’s debt-to-equity ratio of 1.24 indicates a leveraged balance sheet. This means the company has more debt than equity financing its operations.
A high debt load can limit financial flexibility and increase interest expenses, potentially impacting future dividend growth. The telecom giant’s substantial debt burden stems from years of heavy investments in spectrum acquisitions and network infrastructure.
While these investments are vital for AT&T’s competitive edge in the evolving telecom landscape, they pose significant financial challenges. The company must balance its attractive dividend yield with reinvesting in the business and deleveraging its balance sheet.
AT&T’s strong free cash flow and entrenched market position suggest it can manage this balancing act. However, shareholders should be mindful of the company’s debt management strategy, as it’s crucial for both dividend sustainability and long-term competitive positioning.
Valuation and growth prospects
AT&T stock currently trades at 8.62 times 2026 projected earnings. To put this into context, the S&P 500 trades at around 17 times 2026 projected earnings, according to some bullish forecasts.
AT&T appears to be undervalued, compared to the broader market. Value investors may find this feature attractive, especially when combined with the stock’s fairly high dividend yield.
However, AT&T’s bargain-basement valuation isn’t without cause. Wall Street expects the telecom giant to post revenue growth of a mere 1.6% in 2025. Moreover, this sluggish pace is expected to persist, with revenue-growth forecasts stuck in low single digits for the next several years.
Two key factors contribute to AT&T’s underwhelming growth outlook: intense competition among the tier 1 telecoms (AT&T, Verizon, and T Mobile) and the emergence of new technologies that are paving the way for more low-cost competitors to enter the market.
Simply put, AT&T’s stock may not be as big of a bargain as its forward price-to-earnings ratio (P/E) seems to imply.
Is AT&T stock still a buy?
Despite its levered balance sheet and tepid growth outlook, AT&T remains an intriguing option for income-focused investors. The company’s yield towers above its peer-group average and the typical S&P 500 stock.
Moreover, while elevated, AT&T’s payout ratio stays comfortably below the 75% danger zone that often precedes dividend cuts. As interest rates trend lower, AT&T’s attractive yield should continue to draw investors, potentially pushing its shares even higher.
George Budwell has positions in AT&T. The Motley Fool recommends Comcast, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.
