AT&T: Buyers Are About To Strike

AT&T Inc. (NYSE:T) investors have breathed a sigh of relief after seeing T hammered into its early June lows, culminating with the rumor that Amazon (AMZN) intended to enter the wireless space.

I updated investors in my previous article that despite the potential threat then, AT&T investors shouldn't flee. T could be near/at peak pessimism, as the rumor could help "shake off the last of the weak holders."

T's price action over the past month has been constructive, increasing my confidence that its bottoming process is sound and robust. Moreover, management came in strong at a recent June conference, stressing that "there is nothing to the rumors that have been discussed."

As such, it likely helped calm investor nerves about potential disruption rumors that probably saw weak investors bailing out, fearing for the safety of their dividends.

Moreover, AT&T strengthened its thesis with income investors as it declared a quarterly dividend of $0.2775 recently, debunking investors' worries about a potential cut. As such, I believe it has improved investor confidence in the company's ability to navigate the uncertain macroeconomic conditions in the second half, as AT&T maintained its $16B free cash flow or FCF outlook for FY23.

CFO Pascal Desroches provided fresh insights into the company's FCF guidance ahead of its upcoming Q2 earnings release on July 26. Accordingly, AT&T expects to deliver an FCF of between $3.5B to $4B, a significant improvement from its disappointing $1B in FCF for Q1. As such, it implies that Q1's performance was likely a one-off and not expected to be repeated.

Notably, Desroches also articulated that he doesn't anticipate further working capital effects in the second half that could throw up nasty surprises on AT&T FCF projections. In addition, AT&T is optimistic about seasonal boosts in the second half with lower device payments, lifting the company's confidence about achieving an FCF of "$16 billion or better."

Therefore, I believe it likely helped mitigate initial worries about lower new subscriber adds of 300K, markedly below the previous analysts' estimates. As such, I assessed that management commentary suggests that AT&T's growth could inflect in the second half, even though AT&T wasn't keen on guiding this early.

So, I believe investors must assess whether market operators have bought into management's confidence in its FCF projections or if they see higher risks to their dividend payout.

Does it matter? I think it does. Considering that market strategists remain divided in their opinion of a recession, some worried buyers could still be on the sidelines, waiting for the "all-clear" signal first. As such, buying sentiment could remain tepid from momentum investors who aren't sure about investing in companies susceptible to a recession, like AT&T.

In addition, while T last traded at a forward dividend yield of 6.9%, we need to juxtapose it against the 2Y Treasury yield, which last printed at 4.94%. Although it's higher than its 10Y average of 6%, investors should reflect a reasonable margin of safety against the 2Y when pricing in T's valuation, given its debt-laden (net debt: $166.7B) balance sheet. Despite that, with the Fed expected to be much closer to the end of its rate hikes, it's reasonable to expect that T's pessimism could have peaked last month.

The question now is whether it has been reflected in its price action.

As seen above, T's long-term chart indicates that the bottoming process in June was robust, and July has started positively. Dip buyers returned in June to robustly defend the early month selloff, protecting the lows established in October 2022.

As such, it has increased the possibility of a mean-reversion opportunity for T as it remains well below its critical long-term moving averages. However, with the Fed remaining hawkish, I assessed that investors must be patient if they decide to add more positions now.

Despite that, T's risk/reward profile has improved further, with the $14.50 support zone defended stoutly by dip buyers likely seeing an alluring buy zone. With that in mind, I believe the opportunity for T investors to add more exposure is increasingly attractive.

Rating: Strong Buy (Revised from Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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