There are a lot of ways that analysts and investing firms have learned to categorize publicly traded companies. Sector and industry breakdowns are really just the start; depending on the service you may use, you may be able to sift through and group the tens of thousands of available stocks based on every kind and length of trend, technical pattern, fundamental data point or valuation metric. One such kind of grouping is “Dividend Aristocrat” – a rare breed of dividend-paying stocks that haven’t merely paid a consistent dividend over time, but have also sustained 25 years or more of consistent dividend increases.
AT&T Inc. isn’t just one of the largest telecomm companies in the United States, but also one of just 66, current S&P 500 stocks that fit the Aristocrat description. Over the last decade, their leading position in the telecommunications industry also gave them the ability to branch out and diversify their business into the entertainment world.
In 2018, T’s acquisition of Time Warner gave it a foothold in the same industry occupied by media companies like Viacom and Disney that many quickly began to criticize as an overextension of the company’s ability. 2020 saw this unit act as a pandemic-driven drag on the entire company’s bottom line – capped by the company’s decision to spin off the WarnerMedia unit into a new company merged with Discovery. Critics say the deal is a sign that AT&T has admitted it made a bad decision with that acquisition. I think it is worth noting that T will receive $43 billion that will be used to reduce debt, and still retain 71% ownership of the new company.
Among the details included in the announcement is the fact that company announced it would cut its dividend following the spin off. In its latest earnings announcement, management disclosed the dividend would be cut by about 47% – from its current $2.08 per share to $1.11 per share afterward. It makes sense in context of the fact that such a large portion of the company’s portfolio is being moved into a separate, publicly traded company of its own, but it also means that T will give up its place among the Dividend Aristocrat elite.
T is an interesting mix of opportunity and risk right now, as the company continues to emerge from a pandemic that forced a practically complete shutdown of all WarnerMedia production, and which put the company’s operating margins into negative territory through most of the past year. That reality provided a dark cloud that many analysts have seemed to fixate on, even as economic activity has indicated that the company is starting to emerge from that challenging period with useful gains in Net Income, along with still-healthy Free Cash Flow and improving liquidity. It is also a fact that taken alone at the stock’s current price, even with the 47% reduction in its dividend payout, its practical yield will still keep T at the front of the industry for its new dividend yield. Are the those strengths enough to make T’s stock a good bet for a long-term, value-oriented investor?
Fundamental and Value Profile
AT&T Inc. is a holding company. The Company is a provider of telecommunications, media and technology services globally. The Company operates through three segments: Communication segment, WarnerMedia segment, and Latin America segment. The Communications segment provides wireless and wireline telecom, video and broadband services to consumers. The business units of the Communication segment includes Mobility, Business Wireline and Consumer Wireline. The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. WarnerMedia segment also includes Xandr, which provides advertising services. Latin America segment provides entertainment and wireless services outside of the United States. Mexico is the business unit of the Latin America segment, which provides wireless service and equipment to customers in Mexico. T has a current market cap of about $176.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by about 4%, while revenues declined by -10.36%. In the last quarter, earnings were -10.34% lower, while revenues increased by 2.6%. T operates with an operating profile that sunk into negative territory during the early portion of the pandemic but has been showing significant improvement through most of the past year. Over the last twelve months, Net Income was 11.89% of Revenues, and strengthened to 12.31% in the last quarter.
Free Cash Flow: T’s free cash flow is healthy, at a little over $25.4 billion. This number has increased steadily since early 2015, from about $10 billion, but is lower over the past year, from $29.4 billion . The current number translates to a useful Free Cash Flow Yield of 14.51%.
Dividend: T’s annual divided is $2.08 per share, which translates to a compelling, but temporary yield of 8.48% at the stock’s current price. As previously noted, the dividend payout is set to be cut to $1.11 per share after the WarnerMedia spinoff is completed later this year to reflect the smaller size of the remaining company.
Debt/Equity: T carries a Debt/Equity ratio of .83, which is generally considered a pretty conservative number that doesn’t really paint a complete picture. Their balance sheet shows $21.16 billion in cash and liquid assets versus $152.8 billion in long-term debt. Much of that debt is associated with the Time Warner acquisition. The spinoff will pay down a portion of that amount, but still leave a significant debt burden. As with other companies in this industry, T has also historically carried a lot of debt, with more than $100 million in long-term debt on the books since mid-2015. T’s healthy Free Cash Flow and improving Net Income indicate they should have no problem servicing the debt they have.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at a little above $29 per share. That suggests that the stock is undervalued, with 19% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from a May peak at around $34 to its low, reached in December at around $22; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock staged solid, but temporary rally into the middle of January, peaking at around $27.50 before dropping back in the last week of the month to find current support at around $24. Immediate resistance is around $26, near the 38.2% retracement line and following previous pivot activity in that price area. A push above $26 should have short-term upside to about $28, a little above the 50% retracement line and consistent with pivots seen in July and August of last year. A drop below $24, on the other hand should find next support around the stock’s 52-week low in the $22 price area.
Near-term Keys: T offers a high dividend that makes for tempting bait for income-seeking investors; but don’t ignore the fact that the dividend will be reduced this year once the WarnerMedia spinoff has been completed. The market has pushed this stock down to levels not seen in a decade, despite the generally improving fundamentals the company has reported over the last few quarters, and that is one of the main reasons T’s value proposition is attractive right now. If you prefer to focus on short-term trading strategies, the best signal to consider buying the stock or working with call options would come from a push above $26, with upside to around $28 where the 38.2% retracement line currently sits. A drop below $24 could be used to consider shorting the stock or buying put options, so long as you intend to work with very short profit targets; the stock’s 52-week low around $22 means opportunity on the downside should be limited.