AT&T Inc. (NYSE:T) is drawing attention with an implied free-cash-flow yield close to 12% based on current guidance, even as analysts mark down the stock amid concerns over satellite competition. The telecom giant's upcoming earnings report, scheduled for July 22, will be a key test of whether it can generate enough cash to sustain both its network investments and shareholder returns, which together represent about 10.5% of equity value.
Scotiabank, part of The Bank of Nova Scotia (NYSE:BNS), lowered its price target on AT&T to $29.25 from $31 on Wednesday, maintaining a Sector Perform rating. The bank cited "investor trepidation" about additional satellite rivals as a reason for trimming valuation assumptions. Despite the cut, the new target implies an upside of roughly 36% from AT&T's midday price of $21.47. Shares were up about 0.9% on the day.
The timing of the downgrade is notable, as the leading satellite competitor, Space Exploration Technologies Corp. (NASDAQ:SPCX), is facing its own challenges. SPCX shares fell 1.7% to $133.75, dipping below its $135 IPO price for the first time. While public investors are discounting SPCX's future prospects, analysts are trimming incumbent telecom stocks on the competitive threat.
AT&T's free cash flow remains a standout metric. The company targets at least $18 billion this year after capital spending, with plans for roughly $8 billion in share buybacks and an annualized dividend of $1.11 per share. Against AT&T's $150.9 billion market cap, these figures translate to a free-cash-flow yield of 11.9% or higher, a share repurchase yield of 5.3%, and a dividend yield of 5.2%. Combined, dividends and buybacks would consume about 88% of expected free cash flow at the low end of guidance, leaving around $2.2 billion for debt reduction and other uses.
Scotiabank applied a satellite-related discount across all three national carriers but reserved a Sector Perform rating for AT&T. The bank's new target suggests the highest potential upside among the group, as AT&T's shares have absorbed more negative sentiment than its rivals. For context, Verizon (NYSE:VZ) received an Outperform rating with a $51.50 target, implying 19.6% upside, while T-Mobile (NASDAQ:TMUS) was also rated Outperform with a $243 target, offering 28.8% upside.
AT&T posted strong first-quarter results that countered some skepticism. Advanced Connectivity service revenue rose 3.6%, and the company added 584,000 new internet customers, split evenly between fiber and fixed wireless, along with 294,000 postpaid phone additions. Notably, nearly 45% of advanced home internet users also subscribed to AT&T wireless, excluding new fiber customers from acquisitions. CEO John Stankey described it as the company's "best first quarter ever" for Advanced Connectivity internet net adds.
However, the cash target has become more challenging. First-quarter free cash flow came in at $2.5 billion, down from $3.1 billion a year earlier. To hit the annual minimum of $18 billion, AT&T needs to generate at least $15.5 billion over the next three quarters, averaging above $5.1 billion per quarter. Given the variability in cash flow, the July 22 report will carry more weight than typical subscriber metrics.
Management has downplayed the satellite threat, arguing that satellites are meant to fill gaps rather than replace dense land-based networks. CFO Pascal Desroches noted in June that "satellite is a great solution" for about 1% of the U.S. population in rural areas without coverage, while urban and suburban networks remain cheaper per bit. AT&T plans to partner with satellite providers where it lacks infrastructure.
The risks could escalate if satellite carriers drive broadband prices lower or encroach on fiber and fixed-wireless markets. AT&T is running heavier promotions while targeting $23 billion to $24 billion in capital expenditures. Net debt stood at $126.4 billion as of March, with most of this year's guided cash flow already earmarked for buybacks and dividends. Missing the $18 billion free cash flow floor would intensify the trade-off between returning cash to shareholders and reducing debt.
AT&T is set to report results before the market opens on July 22. Scotiabank's target cut aside, the bank sees room for upside if AT&T can maintain solid customer additions, retain households using both wireless and broadband, and improve cash conversion from first-quarter levels. A stronger cash flow performance would help narrow the valuation discount AT&T trades at relative to satellite-focused names.
