Goldman sees one dividend play returning 20% annually in next four years

Investors may like AT & T for its juicy dividend, but the underlying shares also have “significant upside” ahead, according to Goldman Sachs. The Wall Street investment bank sees a number of factors at play that should boost returns for the Dallas-based telecom giant, which pays a dividend yield of 4.89%. “Our bull case suggests a multi-year upside case of double-digit annualized returns for the stock: Taking together the opportunities we see on both fundamentals and valuation, we see upside potential for T above $40 over a four-year period, or a compounded equity return of over 20%,” Goldman analyst James Schneider wrote in a note Monday. T YTD mountain AT & T year to date Among the contributors to AT & T’s double-digit annualized returns is continued improvement in the wireless industry, he pointed out. The total number of wireless competitors has stabilized and Verizon , AT & T and T-Mobile have each announced one or more price increases over the past few quarters, he said. There is also more evidence of moderating capital intensity in the business, he added. Schneider is also bullish on AT & T’s fiber expansion, which he said should accelerate segment growth after revised expansion targets of 40 million to 45 million. “AT & T is the most aggressive builder of fiber in the United States today, which should drive accelerating broadband revenue growth while stemming legacy losses (DSL/U-verse),” he wrote. “We believe the lynchpin of AT & T’s stated strategy is cross-selling fiber and wireless to generate strong returns on a per-customer basis.” Broadband subscriber growth should improve to 1% to 3% in 2024 through 2026 from 0% in 2023 as the legacy business becomes smaller, the analyst said. He sees overall consumer wireline revenue accelerating to 3% in 2024 and 4% in 2025 through 2026. Margins can also move higher, despite legacy revenue declines, as the company decommissions its copper networks, Schneider said “Assuming no growth in the underlying business, by Year 5 (2029), the cumulative cost savings could drive [earnings before interest, taxes, depreciation, and amortization] to a range of $47-50 billion,” he said. Overall, Schneider anticipates sustained EBITDA growth of 3%, which is 100 to 200 basis points faster growth than Wall Street is currently modeling, he said. One basis point equals 0.01%. That sustained improvement on EBITDA growth should warrant a higher multiple over time, he added. “We believe there is upside to AT & T shares on multiple fronts including: (1) better-than-expected future EBITDA growth as outlined above; (2) [and] multiple expansion,” he wrote. “AT & T currently trades at 6.6X Street 2025 EV/EBITDA (per Visible Alpha), a discount to a selected peer group, which we believe stems from investors’ skepticism on AT & T’s ability to sustain current EBITDA growth rates, and given limited free cash flow growth.” AT & T is holding an investor and analyst day on Dec. 3, which Schneider believes will act as a positive catalyst for the stock. The stock, which hit a 52-week high on Monday, is up 37% year to date, excluding the dividend.