Even with the Threat of Volatility, AT&T Stock Still Is a Keeper

Today I’d like to discuss the short- and long-term outlook for the stock price of AT&T (NYSE:), the multinational conglomerate which has an impressive portfolio and diversified revenue stream. Mostly I’d like to consider whether investors should expect AT&T stock to continue its recent trend higher?

Context Is Everything For Investors Mulling Embattled AT&T Stock

Although I believe AT&T stock belongs in a long-term income-generating portfolio, I expect market volatility to continue in July, especially given the fact that many companies will be releasing quarterly earnings.

Therefore, we can expect price choppiness in AT&T stock, too. With the shares up over 5% since early June, any profit-taking in the coming weeks would be a sign to investors to consider buying into the shares.

With that said, let’s take a deeper look into what makes a good long-term investment

AT&T Stock Is Getting Ready to Report Earnings

AT&T is expected to report earnings on July 24. In this upcoming quarterly report, Wall Street is likely to pay attention to how the balance sheet has developed over the past three months.

With a market capitalization of $230 billion, the Dallas-based group breaks down revenue into six main segments.

AT&T’s domestic wireless business is neck and neck with Verizon Communications (NYSE:) for market share. Our readers will be familiar with the fact that Mobility is by far the most important business for AT&T.

Mobility business is both stable and big, leading to $17.6 billion revenue in Q1 2019 results.  Analysts expect the group to continue to generate robust revenue from AT&T’s Mobility business while expanding well into Entertainment and Warner Media.

In June 2018, a federal court approved the merger of AT&T’s  of Time Warner — a deal that has turned T stock a media giant and “content king.” HBO is one of Time Warner’s assets that AT&T shareholders now own, too.  This entertainment network has an enviable library of many shows that generate consistent revenues.

This merger has been weighing on AT&T since early 2018; however, the rest of 2019 should see the question marks slowly disappear and the stock should begin to gain back its footing. In other words, investors have been shy to invest in AT&T shares for some time now, but the company’s long-term plans are likely to reward patient shareholders well.

As internet-based communication becomes increasingly integrated into our daily lives, I find AT&T shares well-positioned to benefit from various commercial opportunities that would eventually benefit the share price.

AT&T Stock Has Strong 5G Prospects

Over the past few years, T stock has lagged behind the broader market. Yet, the company has a strong brand and wireless infrastructure — two factors that are likely to make it a dominant player in the

As we enter the latter part of 2019, we can easily say this decade has witnessed the growth and mass adoption of smart mobile devices. 5G stands for the fifth generation of wireless networks, heralding a new standard for mobile telecommunications that will be significantly faster than 4G, which had started coming out almost a decade ago. It is expected that 5G will be faster up to than the speed of 4G networks.

Therefore. the new 5G technology will boost significantly. 5G will also be at the center of the infrastructure for building smart cities. Coupled with a trailing price-to-earnings ratio of about 12x, T stock deserves further due diligence in the tech world that is getting ready for 5G dominance. Since December 2018, AT&T has been launching its own 5G network in more than a dozen U.S. cities.

The group is the second major telecommunications provider to do so after Verizon. The first wave of 5G cities includes Atlanta, Charlotte, Raleigh, Dallas, Houston, Indianapolis, Jacksonville, Louisville, Oklahoma City, New Orleans, San Antonio, and Waco, Texas. The 5G wireless network boom is just getting started. This is why now may an appropriate time to consider T stock.

AT&T’s Improving Balance Sheet

Most long-term investors do not want to be constantly thinking about the fundamental strength of the stocks in their portfolios. AT&T’s balance sheet has been improving in recent quarters — another reason why I am interested in T shares long-term.

The improving fundamentals are possibly why AT&T stock price has gone up over the past few weeks even though the company posted a .

The company’s key Mobility wireless segment generated revenue of $17.57 million, up 1.2% year-over-year. And the company achieved 80,000 postpaid phone net adds vs. 49,000 postpaid net adds in the year-ago quarter. Wall Street welcomed the news that the mobility segment has increased revenue.

On a final note, over the past few quarters, AT&T’s  has been on Wall Street’s radar. The company finished 2018 with a debt load of $171 billion. The group has recently reaffirmed the commitment to reduce that debt to $150 billion by the end 2019.

Acquiring Time Warner has bloated this debt load. However, the communications giant is now working to cut costs and the debt at the same time. For example, it has recently sold its minority stake in Hulu, a premium streaming service, to its other owners Walt Disney (NYSE:) and Comcast (NASDAQ:), for almost $1.5 billion.

AT&T management is well aware of the importance of decreasing the level of debt sooner than later so that the company can regain investor confidence. It would also be important to note that the debt maturity schedule is quite spread out over the next few decades. Therefore, I am still comfortable with this amount on the books.

AT&T’s Free Cash Flow and Dividends

In a low-interest rate environment, stock investors pay special attention to shares with .  Dividend stocks can be one of the best ways to generate a regular passive income for long-term shareholders.

In general, big blue-chip names tend to be consistently generous dividend payers. And telecommunications companies have traditionally been regarded as relatively safe dividend investments. Experienced dividend investors also pay close attention to a company’s free cash flow as dividends are ultimately paid out of cash.

Free cash flow is what remains in the bank after AT&T has paid interest on its debt, paid any taxes owed, and made all of the capital expenditures necessary to run and invest in the giant business. AT&T is a large business that generates a lot of cash.

The group has recently confirmed that it will have about $26 billion in free cash flow this year. This amount is money left over from operations; in other words, it is not needed to run the business.

In addition to the company’s strong earnings power through telecom and media-related operations, T stock also offers a strong dividend yield at over 6.1%, which is a big attraction for many long-term investors seeking strong stocks to buy for 2019 and beyond.

It is expected that AT&T will have $12 billion in free cash flow left after paying $14 billion in annual dividends to shareholders. It is likely that the company may use this amount to reduce its debts. Lower debt levels may, in turn, enable the company to support a higher valuation and price level as well as increase its dividends.

Finally, over the past 35 years, AT&T has a history of increasing dividends annually. This is yet another important reason why I believe T stock belongs in a capital-growth portfolio. As long as investors still believe in T stock’s prospects, the hefty dividend yield keeps them from panicking and selling the shares. AT&T stock is expected to go ex-dividend on July 9.

Should You Buy AT&T Stock in July?

As we start the second half of the year and the earnings season, many stocks may continue to be volatile in July, and I would not advocate trying to identify stocks that could be immune to a U.S.-China trade war.

If you are an investor who also follows technical charts, then you may want to know that over the past few weeks, the short-term technical chart of T stock has been improving.

The stock is likely to rise toward $34.30, the intraday high seen on Oct. 5, 2018. The stock is likely to head into resistance between $34 and $34.5. The current options activity for July 19 expiry is also showing bets that the stock would rise toward $34.5 soon.

Furthermore, on the longer-term T charts, the relative strength index (RSI), a momentum oscillator that can also be used to identify the general trend for a given stock, has been increasing, suggesting that a more longer-term bullish leg in AT&T shares is likely to be beginning.

If you aren’t already long T stock, you may want to remain on the sidelines until the earnings report on July 24 to give yourself time to study the balance sheet as well as the outlook by the management.

If you are already own AT&T shares, you may also consider initiating positions in conjunction with being long T stock. For example, Aug. 16 expiry at-the-money (ATM) covered calls may enable you to hedge your long position in case of profit-taking following the earnings report. You would also be able to participate in a further up move in AT&T stock price.

In short, despite any potential short-term price weakness, T stock belongs to a diversified portfolio. Amid all the recent market volatility, I regard AT&T as one of the key telecom and media stocks to buy for value and stability.

As of this writing, Tezcan Gecgil holds T and VZ covered calls (July 5 expiry).

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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