AT&T is a buy for dividend investors; DCF valuation suggests it is undervalued.

AT&T offers dividend stock investors a return of approximately 4.4% when looking at the past twelve months. Looking ahead, the dividend yield becomes more attractive.

AT&T management has also accelerated the figure it expects to achieve in profit growth starting in 2028. So, all of this is exciting news, but does it make AT&T stock a buying opportunity for investors looking for passive income or dividends?

One reason investors have recently appreciated AT&T is its more focused strategy of divesting large parts of its business and paying off some of its debt.

This has led to a smaller company, as you can see, with revenues dropping from 185 billion to 127 billion, but most of this decrease was a result of divestments. Organic growth remains in the low single digits , and that's what investors can expect from AT &T in the coming years.

Growth in the low single digits. If it achieves mid-single-digit growth , I think that will be cause for celebration among investors. Earnings per share are likely to grow at a faster rate than revenue growth .

Any growth in earnings per share at a medium to high single- digit percentage, and possibly even a low double-digit percentage, along with gains in productivity. This is something they have already proven to investors.

Operating profit margin rose to 21%, up from about 17.5% in 2017. As you can imagine, AT&T has a large service organization , many employees, and many customer touchpoints, so integrating artificial intelligence helps improve operations.

This is something they have further enhanced by using some open- source models that have reduced their AI costs by nearly 90%. The company's operating profit margins are likely to continue expanding as it achieves revenue growth while keeping costs under control.

The next thing to watch from AT&T is a large wave of capital spending.

Over the past decade, their returns on invested capital have been average to below average. More recently at 8.11%, it barely touches the company's weighted cost of capital. This is important because the next upgrade cycle is just around the corner at AT&T.

5G technology is now complete and finished, and we are looking forward to 6G, which will come within the next two years. This will require significant investments from AT&T, Verizon, and others to keep up with the new technology.

Given that AT&T has not been adept at allocating capital, this is not something AT&T investors are looking forward to.

The dividend payout is attractive at 4.36%. It is still less than what you can get from 10-year government bonds or even money market accounts in most cases. However, you also get the advantage of potential capital gains.

Therefore, you not only receive dividends , but you are also exposed to stock price increases. To better understand what I think about the stock price gains, I wanted to look at the valuation .

AT&T shares are trading at a forward price-to-earnings ratio of 9.9, which I consider a fair valuation for a company in its class.

The company has reached a point of saturation in its market, hasn't it? It is not attracting many new customers to the sector. It primarily maintains its existing customer base and alternates roles with Verizon and T-Mobile in gaining or losing market share.

In the near term, they have a good catalyst here with the release of the dual iPhone, or foldable iPhone, which I think will be a huge product that may facilitate increased opportunities to engage with customers who will have questions and are interested in upgrading to the new iPhones.

So, this is a near-term opportunity for AT&T to increase customer engagement, sell additional accessories, etc., and I think this will be positive for AT&T. I have also updated AT&T's discounted cash flow estimates.

I have calculated the fair value of this company at $34.60. The current market price is $25.50. Therefore, the stock appears to be undervalued when measured on a discounted cash flow basis.

It appears to be valued at its fair value when measured on a forward earnings multiple basis. Looking at the business as a whole, I would say it is slightly undervalued to actually undervalued.

Therefore , considering these factors in comparison to their evaluation, to answer the question: Does this look like a buying opportunity for dividend stock investors? I can say yes.

I have a moderate level of conviction and a moderate level of confidence in this classification. The positive effects are an improvement in the company's profit margins . The downsides are a massive upgrade cycle coming up , and AT&T's less-than-stellar track record in returns on invested capital.