Deep Dive Analysis: AT&T

Fiber-driven growth meets a leverage relapse: Why a stable 4.6% yield isn't enough to secure a 'Buy' rating in 2026.

Quick View

• Ticker: T

• Sector: Telecommunications Services

• Theme: "Connectivity-First" simplification; Fiber-5G convergence; balance sheet repair (interrupted).

• TBFG angle: A core utility emerging from a failed media era, offering high cash flow but currently penalized by a "leverage relapse" due to new acquisitions.

• 12-month scenario range (USD): $18-40

TBFG Bottom Line

AT&T has successfully shed its distracting media skin, but the "Boring" investor must remain skeptical. While the core connectivity business is high-quality and cash-generative, management's decision to re-leverage the balance sheet for the Lumen and EchoStar deals in early 2026 delays the promised share repurchase era. With a PEGY ratio of 1.73 and a forward P/E of 11.8x, the stock lacks a sufficient margin of safety for new capital.

We rate AT&T as Neutral. Current owners should hold for the 4.6% yield, but new investors will find a superior risk-adjusted return in Verizon (VZ), which offers a 5.9% yield with a cleaner deleveraging profile.

Business Snapshot

AT&T generates revenue primarily through two core segments:

Communications ($117B+ Revenue): This is the engine of the company, split into Mobility (wireless service/equipment), Business Wireline (enterprise networks), and Consumer Wireline (broadband/fiber). Mobility drives the bulk of profits, while Consumer Wireline is the growth engine through AT&T Fiber.

Latin America: A smaller segment providing wireless services in Mexico. The company has pivoted to selling “Convergence”—bundling fiber and wireless service to reduce churn and increase lifetime value.

Management & Governance

CEO John Stankey has delivered on the “back to basics” promise, management has pivoted from a "media conglomerate" strategy to "operational excellence". Capital allocation is the primary concern for TBFG.

After divesting WarnerMedia and DIRECTV, management committed to a 2.5x net debt-to-Adjusted EBITDA target. However, 2026 guidance shows leverage jumping back to 3.2x following $5.75 billion in acquisitions (Lumen Mass Markets and EchoStar spectrum). The company continues to invest heavily, with capital investment expected in the 23−24 billion range annually through 2028.

This suggests management still prioritizes footprint expansion over maintaining a pristine balance sheet.

Market & Competitive Landscape

AT&T operates in a mature U.S. triopoly alongside Verizon and T-Mobile, creating high barriers to entry due to spectrum and infrastructure costs ($127B in net licenses).

Moat Trend (Widening in Consumer): The “Convergence” strategy is working; the rate of customers taking both fiber and wireless increased by 200 basis points year-over-year to 42% in 2025. This increases switching costs.

Moat Trend (Narrowing in Business): The Business Wireline segment faces secular decline. A significant goodwill impairment of $4.4 billion was recorded in 2024 due to faster-than-expected erosion of legacy enterprise services.

Competition: T-Mobile leads in 5G speed and network perception in 2026. Verizon is repositioning as the “bond proxy” with a massive 5.9% yield and a simplified business following the Frontier acquisition.

Convergence Threat: Cable giants (Comcast, Charter) are increasingly aggressive in wireless via MVNO agreements, matching AT&T’s bundling strategy.

Financial Trajectory

The five-year revenue CAGR of -7.6% is misleading due to massive divestitures. Isolating the core connectivity business shows 2025 revenue grew 2.7% to $125.6 billion, driven by Mobility and Consumer Wireline, offsetting declines in Business Wireline.

Margins: Adjusted EBITDA margins reached 37.6% in Mobility and 32.8% in Consumer Wireline by late 2025. Management is targeting $3 billion+ in additional cost savings by 2027 through AI and copper decommissioning.

ROIC: Returns on invested capital remain in the mid-single digits, dragged down by a $394.8 billion asset base and the “capital treadmill” of recurring spectrum auctions.

Growth Drivers & Strategic Optionality

Fiber Expansion: AT&T plans to pass 30 million+ locations with fiber. The “Gigapower” joint venture allows off-footprint expansion with lower capital intensity. The acquisition of Lumen’s fiber assets adds 1 million retail fiber subscribers and accelerates the “Advanced Connectivity” transition.

5G/Fiber Convergence: Cross-selling fiber to wireless customers reduces churn and boosts margins. AT&T reached a 42% convergence rate in 2025 (up 200 bps YoY). Reaching 55% would significantly de-risk the cash flow profile. The company aims for double-digit earnings growth by 2028 driven by these synergies.

Fixed Wireless (Internet Air): A new revenue stream capturing customers where fiber isn’t feasible, utilizing excess 5G capacity.

AI Efficiency: Integration of AI for network management and customer service is expected to drive margin expansion through 2028.

Financial Quality, Cyclicality, and Execution Risk

Obsolescence of the Wireline Business: The Business Wireline segment is a melting ice cube. If legacy enterprise revenues collapse faster than fiber growth can offset them, free cash flow will structurally decline.

Capital Intensity Trap: The company projects 23−24 billion in annual capital investment through 2028. If technological shifts (like 6G or satellite) require a new capex cycle before the current one pays off, returns will be permanently impaired.

The Copper Liability: Legacy lead-sheathed cables represent a permanent environmental and legal threat that could require multi-billion dollar remediation.

Leverage Promises: Repeated failure to reach the 2.5x debt target could permanently impair management credibility and force future dividend cuts if a macro shock occurs.

Interest Rate Sensitivity: With over $118 billion in long-term debt, a “higher-for-longer” rate environment raises refinancing costs, directly eating into the free cash flow available for dividends and buybacks.

Valuation

Owner Earnings:

To find “Owner Earnings,” we adjust reported Net Income by removing the $5.6 billion one-time gain from the DIRECTV sale.

• Normalized Net Income: $17.8 Billion

• Depreciation & Amortization (D&A): $20.9 Billion

• Capital Expenditures (CapEx): $20.8 Billion

Owner Earnings = (Net Income + D\&A) - CapEx
Owner Earnings = (17.8 + 20.9) - 20.8 = $17.9 Billion

With a market cap of ~$175B, the Owner Earnings Yield is 10.2%. This supports the current dividend but offers little room for P/E expansion while debt is elevated.

PEGY Ratio Calculation:

• P/E (Trailing): 8.9 and P/E (Forward): 11.8

• Revenue Growth Rate: 2.7% (2025 revenue growth)

• Dividend Yield: 4.6% (Given)

PEGY using Trailing P/E = 1.22
PEGY using Forward P/E = 1.62

Scenario Map (12-Month Outlook)

Bear Case ($18 - $22): Regulatory fees on broadband increase; lead cable liabilities hit $5B+; multiple contracts as debt remains at 3.2x.

Base Case ($27 - $30): Steady postpaid additions offset business wireline decline; leverage drifts toward 3.0x by year-end; returns driven by 4.6% yield.

Bull Case ($35 - $40): 2026 FCF exceeds $18B; Lumen integration is accretive ahead of schedule; buyback program re-authorized as leverage drops toward 2.5x.

TBFG Positioning View

AT&T is a classic Neutral "Hold" for the income-focused investor. The dividend is safe, covered by a 10.2% Owner Earnings yield, but capital appreciation is capped by the 2026 leverage spike.

For those seeking "Boring" telecom exposure in 2026, Verizon (VZ) is currently the superior pick due to its 5.9% yield and more efficient strategic turnaround. Wait for AT&T to prove it can deleverage to 2.5x before adding new capital.