AT&T Inc. (T) isn’t just one of the largest telecomm companies in the United States, but also one of the most established and recognized names in the world. From its origins as “the phone company” to its expansion into wireless telecommunications, broadcast media and even the film industry, this is a company that has almost certainty had a place in your home.
T’s 2018 acquisition of Time Warner gave it a foothold in the film industry occupied by media companies like Viacom and Disney that many quickly began to criticize as an overextension of the company’s ability, but that they argued was necessary to keep up with its media competitors and also against streaming media services like Netflix, Amazon Prime, and so on. 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. The spinoff and merger was completed earlier this year, a move that gives the Warner side freedom to operate more freely than it could under the AT&T umbrella, and AT&T the ability to turn its focus back on its core advantages in the telecommunications industry.
The question of analyzing T from now forward becomes a little less complicated because of the the company’s streamlined focus. It also puts a sharper lens from industry analysts and market commentators on the company’s telecommunications business. The argument some make is that the wireless and telecomm businesses have lagged behind competitors, especially in the ever-important 5G world. Another residual effect of the spinoff is that the company cut its dividend, and in the process gave up its long-standing place among the Dividend Aristocrat elite (companies that have increased their dividend payouts for at least 25 consecutive years). Some analysts suggest that the dividend cut will chase income hunters away from the stock, and I suppose that makes some sense given the size of the dividend payout prior to the spinoff; but I think it is also useful to note that, at the stock’s current price, its $1.11 dividend still offers an interesting annualized yield of 6.04%. That remains well above the S&P 500 average, and still far above the rates offered by long-term Treasury bonds, even as interest rates are rising.
It’s also worth taking the time to look a little deeper; after all, with the Warner Media segment now off the books, the company’s fundamental profile has changed. Critics of the deal point to the fact that T still owns a large portion of the debt it assumed to make the acquisition four years ago, and even with the roughly $40 billion in cash it received to complete the merger with Discovery, that debt remains sizable. The real question, of course is how the company’s other fundamentals have shifted. Prior to the completion of the acquisition, my own analysis suggested that AT&T was nicely undervalued. Is the same true now? Let’s find out.
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 $131 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -27%, while revenues declined by almost -33%. In the last quarter, earnings were -15.58% lower, while revenues declined by almost -22.21%. T operates with an operating profile that sunk into negative territory during the early portion of the pandemic but has recovered nicely, and is showing strength that defies the negative earnings pattern I just described. Over the last twelve months, Net Income was 13.41% of Revenues, and strengthened to 14.02% in the last quarter.
Free Cash Flow: T’s free cash flow is healthy, at a little over $18.4 billion. This number has increased steadily since early 2015, from about $10 billion, but is lower over the past year, from $25.6 billion. The current number translates to a useful Free Cash Flow Yield of 14.04%.
Dividend: T’s annual divided is $1.11 per share, which translates to a very attractive yield of 6.04% at the stock’s current price. While it does mark a reduction prior to the Warner Media/Discovery merger, the current payout is also less than 50% of the company’s most recently reported earnings per share, which I think is a reasonable benchmark to measure a dividend’s sustainability.
Debt/Equity: T carries a Debt/Equity ratio of .95. Their balance sheet shows $4 billion in cash and liquid assets (down from $38.565 billion in the last quarter) against $129.7 billion in long-term debt (compared to $180.225 billion a quarter ago). Much of that debt is associated with the Time Warner acquisition, but the paydown of more than $50 billion in debt is notable. 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 about $16 per share. That suggests that the stock is overvalued, with -12% downside 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 its peak a year ago at around $28.50 to its low, reached this week at around $18; it also provides the baselines for the Fibonacci trend retracement lines shown on the right side of the chart. Following a large gap down following the Warner Media/Discovery spinoff, the stock hovered in a consolidation range between $19 and $21 until the last earnings report, which prompted a new wave selling that pushed the stock below that range. It also marks immediate resistance at $19 where previous support sat, with new support right now at around $18 as the stock is attempting to stabilize. A push above $19 could see about $2 of upside to $21 where the top of that consolidation range acted as resistance on multiple occasions. The distance of that range also provides a basis for potential downside if the stock breaks below current support at $18. In that case, look for next support at around $16 per share.
Near-term Keys: T offers a high dividend that makes for tempting bait for income-seeking investors. The market has pushed this stock down to levels not seen in a decade, which could make the stock look even more tempting. I do think the fundamentals remain generally solid fundamentals, however declining liquidity is a concern to pay attention to that I think is significant enough to agree that the stock doesn’t offer a useful value proposition 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 $19, with upside to around $21. A drop below $18 could be used to consider shorting the stock or buying put options, so long as you plan to take profits quickly once the stock begins to approach $16.