There’s no other way to put it: valuations are bloated in the U.S. stock market. Some people believe this time is different, but remember this quote: “The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.”
Those are the famous words of Benjamin Graham, who’s known as the “father of value investing” and the mentor of Warren Buffett.
If you apply Graham’s reasoning to today’s market, you’ll see that, in general, the margin of safety is a lot thinner than before, especially in the red-hot tech sector.
That doesn’t mean every value investor has to stand on the sidelines. AT&T Inc. (NYSE:T), for instance, is well positioned to capitalize on the booming 5G industry. And yet, T stock is not expensive at all.
You see, investors have been on the hunt for 5G stocks for quite some time now. But the neat thing is, you don’t have to look very far to get a piece of the action because there are tons of businesses that can benefit from the increasing 5G adoption, and some of those businesses are hidden in plain sight.
As one of the largest telecommunications, media, and entertainment companies in the world, AT&T is obviously a 5G stock. The company’s communications segment provides mobile, TV, and broadband services to more than 100 million customers in the U.S.
And even though 5G deployment is just getting started, “AT&T 5G+” is already available in 38 cities in the country. (Source: “AT&T Rolls Out Super-Fast 5G+ Across the U.S.,” AT&T Inc., February 1, 2021.)
While the company has the potential to substantially benefit from the 5G rollout, AT&T stock hasn’t received much investor enthusiasm lately. In fact, if you take a look at its chart, you’ll see that T stock is down about 16% over the past 12 months.
AT&T Inc. (NYSE:T) Stock Chart
Chart courtesy of StockCharts.com
As a result of the downturn in its share price, AT&T stock could represent an opportunity for value-conscious investors.
Here are some numbers. AT&T generated adjusted earnings of $3.18 per share in 2020. And as of this writing, T stock trades at $29.30 apiece. Simple math shows that the company has a trailing price-to-earnings ratio of 9.2 times. (Source: “AT&T Reports Fourth-Quarter and Full-Year Results,” AT&T Inc., January 27, 2021.)
To put that in perspective, the trailing price-to-earnings ratio for the S&P 500 index is about 39.9 times at the moment. (Source: “S&P 500 PE Ratio,” multpl.com, last accessed February 26, 2021.)
In other words, judging by its price-to-earnings ratio, AT&T stock looks like a bargain in today’s market.
Of course, the bears would argue that the reason a stock has a cheap valuation is that it lacks growth.
And to some extent, they have a point. AT&T Inc. earned $171.8 billion of revenue in full-year 2020, which was less than the $181.2 billion it generated in 2019. In particular, multiple business segments were impacted by the COVID-19 pandemic.
However, the performance by the company’s communications segment—which is where the 5G tailwind will most likely help—remained strong. In the fourth quarter, AT&T’s wireless carrier business had 800,000 postpaid phone net additions. In full-year 2020, the company had its best postpaid phone net adds in a decade and its second-lowest postpaid phone churn ever.
Looking ahead, management expects AT&T’s consolidated revenue to grow by about one percent in 2021. The company’s adjusted earnings per share, on the other hand, are projected to be flat.
Those are not exciting numbers. However, because 5G adoption is going to be a multi-year process, I expect AT&T Inc.’s business to get back on a growth track in the future.
Last but certainly not least, T stock investors don’t necessarily have to rely on rising stock prices to earn a return. The company pays quarterly dividends of $0.52 per share, which, at the current share price, translates to an annual yield of 7.1%.
Note that, with dividends, it doesn’t matter where a company’s stock price is going. If the company decides to pay a dividend, shareholders will earn that cash return with certainty.
It helps that AT&T has a track record of paying not only a stable dividend, but an increasing one. The company has raised its payout for 35 consecutive years. (Source: “AT&T Inc. Historical Common Dividends Data,” AT&T Inc., last accessed February 26, 2021.)
Put it all together and it’s easy to see why AT&T stock could be special. AT&T Inc. has a very inexpensive valuation by today’s standards, it’s well positioned for the 5G era, and it provides a surefire way for investors to make money through dividends.
For those who want some exposure to 5G stocks but are concerned about the bloated market environment, T stock deserves a serious look.