Why AT&T Stock Rallied 10.6% in September

Shares of AT&T (NYSE: T) jumped 10.6% in September, according to data provided by S&P Global Market Intelligence. A couple of factors drove that rally. AT&T agreed to sell its remaining stake in DirecTV to its partner. The company also provided investors with an optimistic outlook for what's ahead.

Here's a closer look at why these catalysts drove the telecom stock higher last month.

Its future is coming into a clearer focus

After much speculation, AT&T revealed that it agreed to sell its remaining stake in DirecTV to its partner TPG. The company expects to receive about $7.6 billion in cash payments for its 70% interest in the satellite TV provider. The transaction should close in the second half of next year. However, it will receive the cash payments in stages through 2029.

The sale will pave the way for DirecTV to acquire Dish from its owner, EchoStar. It's paying just $1 for Dish, plus assuming $9.8 billion of that company's debt. Meanwhile, the transaction will enable AT&T to strengthen its balance sheet and focus on growing its fiber and wireless businesses.

AT&T is very optimistic about the future of those businesses. CEO John Stankey spoke at a Goldman Sachs conference last month. He noted that the company's wireless business is healthy and performing well. Meanwhile, he stated that its fiber penetration rates continued to exceed its initial base case assumptions. The company's strong performance has it on track to achieve its 2024 financial guidance. Furthermore, the company is on pace to reach its leverage ratio target of around 2.5 in the first half of next year, and that's before the impact of the DirecTV sale.

The company's positive comments about its future led analysts at Goldman Sachs to name AT&T one of its top buy picks in the telecom sector last month. The investment bank believes the company will see improved revenue in the future and could potentially start buying back its shares, given the improvement in its leverage ratio.

Is AT&T a buy after last month's surge?

With last month's rally, shares of AT&T are up more than 30% this year. That surge has lowered the company's dividend yield to around 5%, which is still pretty attractive considering the S&P 500 yields less than 1.5%. With its balance sheet improving, AT&T could soon start returning additional cash to shareholders through an increased dividend and stock repurchase program. A buyback could be a good use of capital, given AT&T's dirt cheap valuation. Even after its surge, it trades at less than 10 times its forward P/E, which is a more than 50% discount to the S&P 500. However, while AT&T offers many attractive qualities, it's not the best telecom stock to buy for income right now.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.