Could AT&T Stock Beat the Market in 2023?

Late last month, AT&T (T 0.89%), the leading wireless communications carrier in the United States, delivered its results for 2022’s fourth quarter. For shareholders, the stock has been a decade-long disappointment. It’s down by more than 25% since 2013.

However, AT&T’s latest quarterly report showed the company has momentum in a critical area, which could set up investors for market-beating returns this year. Here is why AT&T shareholders could have a great 2023 and why its juicy dividend is the healthiest it’s been in years.

Widening the gap in wireless leadership

AT&T entered 2022 with a U.S. wireless market share of approximately 44%. You’re often the hunted when you’re on top, but that hasn’t stopped AT&T from growing its subscriber base. The company added 2.9 million postpaid phone subscribers in 2022, building on a strong 2021 when it added 3.2 million.

There are not a ton of growth opportunities in the U.S. wireless landscape. Most people have smartphones at this point, so growth typically comes from taking customers from other carriers. For example, AT&T competitor Verizon Communications added just 313,000 postpaid subscribers in 2022, so AT&T has had more success picking up new users. That translated to positive business results.

AT&T revenue streams Q4 FY22.

AT&T’s mobility division, its core business, grew revenue by 1.7% year over year in Q4. Management is guiding for 4% revenue growth or higher in 2023; that’s welcome news considering that mobility contributed 79% of AT&T’s total EBITDA in the fourth quarter. In other words, mobility is AT&T’s cash cow, so the growth will be felt in its bottom line.

A safe 5.7% dividend yield

Most people who invest in AT&T stock do so with its dividend in mind, even if total returns can be fun. The company cut its dividend when it spun off its entertainment business. In hindsight, shareholders are probably happy with the cut. It helped AT&T’s balance sheet, and investors still get a nearly 6% yield at the current price — not too shabby.

Consider that AT&T is now spending about $2 billion per quarter on dividend payments, an annual expense of just over $8 billion. AT&T’s free cash flow in 2022 was just over $14 billion, giving it a dividend payout ratio of 57%. That’s plenty of room to pay the dividend and still have billions of cash leftover to help pay down debt on the balance sheet. The company’s long-term debt load of $136 billion is its lowest since 2017.

But it gets better. AT&T’s expected 2023 growth in mobility could translate to more cash flow. Management is guiding for at least $16 billion in free cash flow in 2023, which would lower its payout ratio to just 50% and leave more cash to pay down debt. Shareholders can feel good about AT&T steadily regaining its financial health while getting paid well to hold shares.

Depressed valuation could drive strong total returns

AT&T is an excellent stock for retirees and income-focused investors for these reasons alone. But AT&T could also beat the market in 2023. It has had a bloated balance sheet for years, and investors have generally soured on the stock, which has taken a toll on its valuation. Today, AT&T trades at a forward price-to-earnings (P/E) ratio of just 8 based on management’s guidance for 2023 earnings per share (EPS) of $2.40.

Hypothetically, suppose sentiment around the stock improves due to its improved balance sheet and mobility growth. If the market traded the stock to a P/E multiple of just 12 by year’s end — still below its 10-year median of 15 — shares would have an upside of nearly 50% without even factoring in the dividend. Considering the company is arguably healthier now than it was during the past decade, it seems reasonable that AT&T’s valuation could at least recapture its long-term averages.

Will it happen? I can’t answer that, but the market likes stocks with solid fundamentals, and it typically finds them eventually. Assuming that occurs in 2023, shareholders could see this typically conservative stock become a Wall Street darling.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.