AT&T (NYSE: T) is a leading telecom company in the country — and as it has exited the streaming and media businesses and refocused on its core operations, it has been proving to be a solid investment again. This year, the stock is up around 19%, proving an excellent buy even as the markets have struggled.
Over the past 12 months, its gains extend to 62%. Can the stock build on this rally and go even higher, or is it too late to invest in AT&T?
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Is AT&T stock too expensive?
When a stock rallies as significantly as AT&T has, it begs the question of whether it’s too late to invest in it. Given its mammoth gains over the past year, the stock now trades at a price-to-earnings (P/E) multiple of nearly 17. That’s well above what it has averaged over the past three years when investors were paying around 11 times its trailing earnings.
T PE Ratio data by YCharts
Rival Verizon Communications (NYSE: VZ), which has struggled recently, still trades at a much more modest P/E of 10. But when you compare AT&T stock against the S&P 500 where the average P/E multiple is 22, a case can be made that it’s not terribly expensive when compared to the broader market.
Why the stock could continue to rally
Although it isn’t as dirt cheap of a stock as it was in the past, AT&T has been performing well in recent quarters, and if that trend continues, there may more investors piling money into the telecom stock in the future.
AT&T reported its latest earnings numbers on April 23, and they showed good, consistent growth for the first three months of the year. It was the 21st consecutive quarter where the company’s fiber net additions totaled at least 200,000 (they were well over that at 261,000). And its postpaid phone net adds topped 324,000. Verizon, on the other hand, reported postpaid phone net losses of 289,000 over the same period — more than double the 114,000 it reported a year ago.
When compared to its key rival, Verizon, AT&T is establishing itself as the better telecom stock of the two, and that could persuade more investors to buy it. It is, however, a question of how much more investors may be willing to pay for AT&T’s stock (in terms of P/E) compared to Verizon.
One area where its rival has an advantage is in terms of yield, as Verizon pays 6.5% versus 4.1% for AT&T. However, for investors seeking the best overall return, not just dividend income, AT&T can make for a much more compelling case than Verizon at this point. While a high yield is great, Verizon’s business is facing some big question marks (e.g. whether it can stop the ongoing loss of subscribers) that risk-averse investors may want to avoid.
Is AT&T stock a good buy?
AT&T’s business is doing well even though its overall growth rate last quarter was just 2%. The company’s ability to win over customers and provide value, especially when compared to Verizon, suggests that the stock can still be a good buy at this point and that it may go even higher.
And although it has risen significantly over the past year, it doesn’t look overpriced as investors may simply just be realizing the value it possesses; AT&T was arguably overdue for a rally, especially in light of its recent results. Its returns may not be nearly as strong over the next year, but with a strong yield and encouraging fundamentals, this can still make for a good investment to hang to for the long term.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
