AT&T's Stock Is 'Less Attractive' As Customer And Dividend Worries Mount, Analyst Says

Morgan Stanley analyst Simon Flannery downgraded AT&T Inc T from Overweight to Equal-Weight with a $20 price target.

The re-rating followed sustained outperformance in 2022, driving a less attractive relative valuation, mainly vs. Verizon Communications Inc VZ. 

Currently, the stock remains inexpensive on some valuation measures and could hold up well in a choppy market environment. However, the analyst expects 2023 to be another year of heavy investment, while strong KPI momentum could be more difficult to sustain as the wireless industry matures. 

AT&T's KPI trends, recent pricing actions, and productivity improvements have supported financial performance. However, extended customer payment terms and the cost of higher wireless activity pressured free cash flow. 

AT&T focuses on driving growth with 5G and fiber expansion, although it still has material exposure to legacy revenue streams.

Flannery's FCF forecast missed AT&T's original guidance due to inflationary cost pressures, while AT&T's capex will remain elevated, delaying the achievement of the leverage target and postponing any resumption of stock buybacks.

One area of focus in coming quarters will be customer delinquencies in a more challenging macro climate, with AT&T noting that current trends are slightly above pre-pandemic levels. 

AT&T continues aggressively upgrading its wireline network to fiber. However, there is still a long way to go leaving it vulnerable to competition from fiber over-builders, cable, and fixed wireless competitors. 

Business wireline trends continue to be challenged by secular pressures, while 2023 could see additional macro pressures on enterprise IT spending. Consolidation remains a potential option for AT&T for this and other assets.

AT&T's stock continues to look inexpensive on a PE and PE relative basis, but its dividend yield of 5.9% reversed a longstanding yield premium for AT&T versus its closest peer Verizon. 

AT&T's yield stands at a ~230bp premium to the 10-year treasury yield, at the lower end of historical trends. 

AT&T has not indicated that it plans to grow the dividend from here after reducing the payout earlier in the year in conjunction with the WarnerMedia transaction. 

Price Action: T shares traded lower by 2.38% at 18.45 on the last check Thursday.