This article reports on the role of annealing on the development of microstructure and its concomitant effects on the thermoelectric properties of polycrystalline AgPbmSbTe2+m (m = 18, lead–antimony–silver–tellurium, LAST-18) compounds. The annealing temperature was varied by applying a gradient annealing method, where a 40-mm-long sample rod was heat treated in an axial temperature gradient spanning between 200 and 600 °C for 7 days. Transmission electron microscopy investigations revealed Ag2Te nanoparticles at a size of 20–250 nm in the matrix. A remarkable reduction in the thermal conductivity to as low as 0.8 W/mK was also recorded. The low thermal conductivity coupled with a large Seebeck coefficient of ∼320 μV/K led to high ZT of about 1.05 at 425 °C for the sample annealed at 505 °C. These results also demonstrate that samples annealed above 450 °C for long term are more thermally stable than those treated at lower temperatures.