AT&T's stock is trading near three-year highs. Here's what's clicking.

By Emily Bary

While rate-cut optimism could be helping AT&T's stock toward its best month in nearly two years, there's also been growing validation of the company's fiber strategy

AT&T Inc. shares are heading for their best monthly performance in nearly two years, which has lifted them near three-year highs.

Part of that reflects optimism around the Federal Reserve's recent move to cut interest rates, which could make AT&T's (T) dividend yield more attractive. The stock currently yields 5.14%.

But the bigger factor behind AT&T's September stock surge could relate to the company's core business. Specifically, investors seem to be showing more respect for AT&T's years-long bet on fiber connectivity, which looks well-timed as people see their data needs grow.

Wireless companies increasingly have been encroaching on the turf of broadband companies, and vice versa. While some of AT&T's rivals made pushes into fixed-wireless access, betting that they could use excess wireless capacity to offer customers home internet, AT&T has focused its efforts on fiber as it looks to offer more broadband service.

There's been growing validation of AT&T's approach. For one, Verizon Communications Inc. (VZ) recently announced a $20 billion deal for Frontier Communications Parent Inc. (FYBR), a fiber operator.

"I think that got a lot of investors' attention," including from those "who may have still been skeptical of what AT&T was doing," Raymond James analyst Frank Louthan told MarketWatch. He noted that Verizon has a little under half the footprint of AT&T in fiber and plans to purchase Frontier at a premium.

See more: Verizon plans big fiber bet with $20 billion Frontier deal. Does it make sense?

Additionally, AT&T is seeing results manifest in its own business as 40% of AT&T fiber customers also choose AT&T for wireless.

"Our success is wherever we have fiber, we are much stronger participants and players in the wireless market," Chief Operating Officer Jeff McElfresh told MarketWatch. Churn is lower for customers who get more than one product from AT&T, and he said their connection to the company's brand is stronger too.

McElfresh isn't sweating Verizon's deeper push into fiber, noting that the company could face a complicated regulatory process for approval. "While they're working on that, we're going to go build more fiber and win more converged customers and grow the performance of our company," he said.

Read: A Lumen executive talks AI, Verizon's fiber deal - and meme-stock status

Not all are as effusive about AT&T's position, however, with MoffettNathanson analyst Craig Moffett writing over the summer that he thought cable operators might be in a better spot when it comes to the trend of "convergence," or wireless and internet coming together.

The cable companies have their existing broadband networks, and now Charter Communications Inc. (CHTR) and Comcast Corp. (CMCSA) offer wireless plans that leverage Verizon's network.

"AT&T doesn't have a wireline answer in the vast majority of the country. If the world moves in the direction of convergence - or worse, if they help move it there themselves - then AT&T loses everywhere they don't have a wireline network," Moffett wrote in a recap of AT&T's last earnings.

McElfresh, for his part, said those cable companies are disadvantaged in wireless because they don't own the networks their plans rely on.

"The things that we are able to do with our wireless networks and converging them at the edge with customers requires deep software development, deep architectural changes in a wireless network that are really only available to those who own and operate one," he said.

Times have changed in the telecommunications industry, according to McElfresh. Friends used to ask him when AT&T would build cell towers near where they lived, but now they ask when their area is getting fiber. And McElfresh himself wouldn't have guessed years ago that people would ever have a need for a gigabit of fiber in their homes, but now customers have many devices in their homes running data-intensive tasks like streaming and video calling.

In that sense, McElfresh thinks AT&T made the right call by choosing to invest heavily in fiber at a time when carrier competitors were pushing fixed-wireless home-internet services that essentially meant customers would get broadband service through the same network that serves them mobile connectivity.

"When you start to mix broadband traffic and the demands on the wireless network, and you put that pressure on a network that was designed for high [average-revenue-per-user], high-performing postpaid wireless subscribers in a very competitive market, you realize that fixed wireless is just a temporary stopgap," he said.

Louthan said the demand for fiber also reflects that customers often pay for greater speeds than they actually need. "Wireless is taking market share, but the key factor is the U.S. consumer buys the fastest marketed broadband speed, whether they need it or not," he said.

There are "enough consumers out there that have the incremental $20 to $30 a month and would just rather have a more stable, fixed-line connection with a consistently higher rate of speed," according to Louthan.

AT&T's story is also simpler now than when the company began its heavy fiber investments. Four years ago, AT&T was spending on fiber, but the company still housed the WarnerMedia and DirecTV business. Since then, it has spun off those two media units and refocused the business around telecommunications.

The company's old management team used to have a credibility problem on Wall Street, according to Louthan, and investors would punish missteps hard. The recent stock momentum "really gets back to just a simplification of the business that we think the market is finally recognizing," he said. More critically, investors are "beginning to believe management."

That comes down as well to AT&T's work to shore up its balance sheet, with a goal of getting to a 2.5x ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization.

"While we've been investing more than any of our competitors in the segment, we've also been paying down that debt," McElfresh said. "And I think you're seeing now light at the end of the tunnel. I think the investment community is recognizing that that 2.5x leverage target is now right around the corner."

More from MarketWatch: Why people are now keeping their phones for over 3 years, according to Verizon's CEO

-Emily Bary

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09-25-24 0832ET

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