AT&T (T) has been somewhat of a controversial stock to hold over the last couple of years, mostly due to poor management decisions and a massive debt burden. Yet it is a stock that I not only hold but am still happily buying.
- AT&T History
- DirecTV and TimeWarner
- Latest Financial Statement
- Outlook for the future
AT&T was founded way back in 1885 as the Bell Telephone Company by Alexander Graham Bell, Gardiner Greene Hubbard and Thomas Sanders after Bell’s patenting of the telephone. A subsidiary, the American Telephone and Telegraph Company (AT&T) was acquired by the Bell Company and remained the main company for legal reasons. AT&T established subsidiaries throughout the USA and Canada and held a monopoly on phone service, authorized by government authorities throughout most of the 20th Century.
This monopoly was known as the Bell system and earned the nickname Ma Bell, that is until it ran into trouble. In 1982 US regulators broke up the AT&T monopoly by requiring AT&T to divest its subsidiaries turning them into individual companies. While AT&T continued to operate long-distance services, the breakup opened it up to competition from rivals MCI and Sprint.
Southwestern Bell, later becoming SBC Communications, was one of the companies created by the break up of the AT&T monopoly. SBC went on to be very successful making a number of acquisitions including Metromedia, then in 2005 it bought its former parent company AT&T for $16 billion. After the purchase SBC adopted the more well known name of AT&T and its brand
2011 proved to be a difficult year for AT&T with the attempt to buy T-Mobile for $39 billion. However, this faced huge government and regulatory resistance and the bid was withdrawn. But due to the original acquisition agreement T-Mobile received $3 billion in cash along with access to $1 billion worth of AT&T held wireless spectrum. Essentially, due to the takeover bid failing, AT&T inadvertently funded a competitor.
DirecTV and WarnerMedia
The previous CEO Randal Stephenson pursued a policy of buying up companies in order to grow AT&T into a massive telecommunications conglomerate. The failed T-Mobile bid was one of these projects. However, the two big highlights of Stephenson’s tenure as CEO was the acquisition of DirecTV for $48.5 billion and WarnerMedia for a huge $85 billion.
DirecTV has proved to be one of the most controversial acquisitions that AT&T has made over the last two decades. DirecTV, a cable TV company, was purchased by AT&T in 2015 just as online streaming was growing in popularity. Many have rightly questioned this acquisition of a company in an era of growing Netflix dominance. This has been further compounded by the fact that DirecTV is reportedly valued at $15 billion representing a significant loss on investment.
In 2018 AT&T was given the go-ahead to purchase WarnerMedia for $85 billion, while this has generally a successful deal it caused AT&T’s debt to explode to a massive $180 billion. However, with WarnerMedia came not only a massive film studio but also a HBO and a new streaming service – HBO Max. While HBO Max has not had the most glamorous beginning, unlike Disney+, it does still have great potential.
Stephenson’s time as CEO can be summed up as a series of management decisions that were very questionable, including multiple multi-billion dollar acquisitions and a massive debt burden that continues to be a source of concern for investors. That being said, Stephenson grew a company which despite being loaded with debt, generates enormous amounts of cash and pays a relatively stable dividend.
The most controversial news in 2020 from WarnerMedia was that Warner Bros. will launch every 2021 movie on HBO Max at the same time as release in cinemas. Naturally, this was huge news, albeit not entirely original. Earlier this year Disney released ‘Mulan’ on Disney+ as a one time $30 purchase. It is expected that HBO max will host all Warner Bros. 2021 releases for 1 month in order to encourage subscriber growth. While this has come with a lot of criticism from Hollywood, especially director Christopher Nolan, I believe this to be a good step forward for HBO Max and will continue subscriber growth.
Latest Financials Results
The current CEO John Stankey took up his position in July 2020, and he has hit the ground running. In the latest financial statement of Q3 2020 he establishes three main priorities: to focus on market-based priorities (including 5G), making the company effective and efficient and improving the balance sheet. This last priority was very much welcomed by investors who have been very concerned about the debt burden.
Since the WarnerMedia acquisition in 2018 AT&T has been able to pay down debt from a total of $180 billion to $149 billion (a reduction of $31 billion). This is a massive achievement in just two years. The CFO has also done an amazing job of managing this debt taking advantage of a low interest rate environment. Debts have been refinanced at a rate of 4.1% interest down from 4.4%, all of which are easily covered by existing cash flow.
The last results also detail a strategic review and monetization of non-core assets; essentially, the company is reviewing assets that could be sold that are not considered part of the core operations. It is expected that $3 billion+ in asset sales to have been concluded. The rumoured sale of DirecTV is also part of this strategic review, however it appears to be difficult to find a buyer for an acceptable price. All of these sales are expected to contribute towards further debt reduction. The Q4 results should show any progress in this area.
Below are the key fundamentals of AT&T stocks:
- Market Cap: $204.14 billion
- P/E ratio: 12.89
- Debt to Assets ratio: 66.61%
- Earnings Per Share (EPS): $1.52
- Dividend: $2.08
- Dividend Yield: 7.29%
- Cash flow per share: $5.64
Future Outlook for AT&T
AT&T share price at the beginning of the Covid19 pandemic took a hit like so many other companies with it plummeting in March. Since then the stock as stayed more or less flat being still down 26.7% for 2020, and it is only up 6% from its March low.
When you look at the 5yr graph of the share price, it shows much the same picture of being more or less flat. This could be explained by the fact that AT&T has been plagued by poor management decisions with regards to acquisitions as well has a huge debt pile. However, it is not all doom and gloom, with the change in CEO and very much a change in direction I see AT&T having a bright future ahead of it.
I personally do not think that the growth of HBO Max has been properly priced into the share price. Additionally, with so many commentators and investors being so fixated with the debt, which is being effectively managed, AT&T’s cash flow has been overlooked. Cash flow is everything in business and AT&T has a lot of it. As of Q3 2020 it had generated $19.8 billion year to date. The dividend which currently yields more than 7% is easily covered by cash flow at a pay-out ratio around 57%. This leaves plenty of cash to go towards investments and debt repayments.
On cash flow alone, I would invest more into AT&T. However, with the change in management and solid direction and vision going into 2021, make this company even more appealing to me. I would not expect to see a share price around the $39 mark in 2021.
None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.