T with Nobias technology: Is This AT&T A Buy Down Here at 52-Week Lows?
AT&T (T) has been in the proverbial doghouse for years now. The stock has been a major underperformer, posting -31% gains during the last 5 years, which has drastically underperformed the S&P 500, which is up 103.6% during that same period of time. To understand AT&T’s plight today, you need to be aware of the failed empire building plans that the company began during the last decade under prior management.
AT&T shares have struggled, in large part, because of their massive debt load brought on by mergers and acquisitions which did not pan out as the company’s management team hoped. AT&T spent approximately $67 billion of DirecTV assets in 2015. This move was made during the dawn on the digital age in terms of content streaming and the satellite TV market has been shrinking ever since.
AT&T attempted to rectify that mistake in 2018, buying Time Warner for approximately $85 billion, attempting to build out its content intellectual property and streaming assets with what was once considered a crown jewel in the market: HBO. However, the telecommunications company has struggled to generate growth with its media assets and in May of 2021, the company announced that it was partaking in a $43 billion merger with Discovery Communications (DISCA) which will result in AT&T’s media assets being spun off into a new company via a Reverse Morris Trust, combined with Discovery’s content and streaming IP, once again, separating the stock’s telecom and media assets.
AT&T with Nobias technology Oct 2021
Management essentially admitted defeat in the media space, saying that they were going to create two pure play companies to better take advantage of trends in the media and telecom spaces. In the press release related to the deal, AT&T made compelling arguments as to why this plan was in its shareholders best interests. The company noted that, “The “pure play” content company will own one of the deepest libraries in the world with nearly 200,000 hours of iconic programming and will bring together over 100 of the most cherished, popular and trusted brands in the world under one global portfolio, including: HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, the Turner Networks, TNT, TBS, Eurosport, Magnolia, TLC, Animal Planet, ID and many more.”
In the streaming wars, the size and scale of a given company’s content library is of paramount importance. To achieve positive cash flows in the over-the-top content delivery industry, a company needs to achieve massive global scale. And, by combining so many diverse types of content under one roof, Warner Media and Discovery hope to be able to achieve the demand required to post a profit. The press release read, “The transaction will combine WarnerMedia’s storied content library of popular and valuable IP with Discovery’s global footprint, trove of local-language content and deep regional expertise across more than 200 countries and territories. The new company will be able to invest in more original content for its streaming services, enhance the programming options across its global linear pay TV and broadcast channels, and offer more innovative video experiences and consumer choices.”
This is all well and good; however, AT&T shares are down roughly 17.5% since this merger was announced. Why? Well, in large part, because of the eventual dividend cut that is going to be associated with the deal. You see, throughout AT&T’s long-term underperformance, the stock provided a relatively stable and attractive high yield to income oriented investors. This was the stock’s calling card. Today, AT&T yields 7.75%. However, once the deal goes through in 2022, T investors can expect a much lower payment than the $2.08/share annual dividend that they receive today.
During the merger press release, AT&T highlighted its “Attractive dividend”, saying that it will be “resized to account for the distribution of WarnerMedia to AT&T shareholders.” The company continued, noting, “After close and subject to AT&T Board approval, AT&T expects an annual dividend payout ratio of 40% to 43% on anticipated free cash flow1 of $20 billion plus.”
The term “resized” means slashed. In 2020, AT&T spent roughly $15 billion paying its dividend. Moving forward, the company plans to pay roughly $8b in dividends. Sure, AT&T shareholders will receive shares of the new media company, which they can sell, and use the proceeds to buy more of the telecommunications company to augment their passive income stream; however, there are tax implications here and at this point in time, it’s unknown what share price the new media shares will trade with and whether or not their value will allow income oriented investors (largely retirees) to make up for the massive dividend shortfall created by the deal.
This uncertainty has inspired many income oriented to sell their shares and T continues to languish near 52-week lows. However, even though the sentiment surrounding the stock remains poor, AT&T does appear to be cheap and this may present an interesting opportunity for contrarian investors. Therefore, we wanted to take a look at what some of the credible authors tracked by the Nobias algorithm have had to say about shares recently.
During its most recent earnings report, AT&T beat Wall Street estimates on both the top and bottom lines. The company posted revenues of $44 billion, which were up 7.4% year-over-year and came in $1.27 billion ahead of analyst estimates. The company’s non-GAAP earnings-per-share came in at $0.89, beating analyst estimates by $0.09/share.
Anusuya Lahiri, a Nobias 4-star rated analyst, covered these results in a Benzinga article. She highlighted the company’s operational performance saying, “Communications segment revenue grew 6.1% Y/Y to $28.1 billion due to increases in Mobility and Consumer Wireline more than offsetting a decline in Business Wireline. The operating margin was 26.1%.”
Lahiri continued, “Mobility revenue rose 10.4% Y/Y to $18.9 billion due to higher equipment and service revenues. The operating margin was 31.7%.” She also noted that, “Total net adds were 5.5 million including 1,156,000 postpaid net adds, 789,000 postpaid phone net adds and 174,000 prepaid phone net adds. The postpaid phone churn of 0.69% was the lowest churn ever.”
Moving on to the media side of things, Lahiri wrote, “WarnerMedia revenue increased 30.7% Y/Y to $8.8 billion, reflecting partial pandemic recovery, higher content and other subscription, and advertising revenues. The operating margin was 19.2%.” And with regard to the size/scale of the digital streaming platform, she said, “There were 47.0 million domestic HBO Max and HBO subscribers, up 10.7 million Y/Y. Domestic subscriber ARPU was $11.90.”
Finally, regarding management’s future outlook, Lahiri said: “AT&T raised FY21 revenue growth guidance from 1% earlier to 2%-3%. AT&T's revenue guidance of $175.2 billion-$176.9 billion is above the analyst consensus of $174.4 billion. It expects the Adjusted EPS to grow in the low- to mid-single digits. It raised the global HBO Max year-end forecast to 70 million - 73 million subscribers. This all seems like good news. However, T shares have fallen roughly 4.4% since these results.
Mircea Vasiu, a Nobias 4-star rated analyst, provides some color on the decline in a recent article which is focused largely on the technical trends driving T shares. In the piece, Vasiu provided a chart showing the technical data and said, “Judging by the stock price evolution, the yearly chart shows pressure on massive dynamic support following a series of lower highs. That is a bearish technical analysis development for the AT&T stock price.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
With the benefit of hindsight, it appears that Vasiu was correct. But, what does the broader Nobias credible author community have to say about T shares? For the most part, after the stock’s post-merger announcement sell-off, the community is bullish. Right now, 93% of the credible authors that we track offer “Bullish” sentiment on AT&T shares.
The average price target of the credible analysts that we track for AT&T is currently $33/share. Coincidentally, this level is essentially in-line with where the stock traded prior to the DIscovery merger announcement. In other words, it appears that the credible analysts that we track believe that the stock’s recent sell-off is unjustified. Today, AT&T trades for just $26.77/share. Relative to the $33 average price target that we see, this represents upside potential of approximately 23.3%.
So much of the success of the AT&T/Discovery merger is going to come from how well the new media company performs. At this point, it’s impossible to know how well the combined Warner Media and Discovery assets will stack up against the likes of Netflix (NFLX) and Disney+ (DIS) in the streaming arena. The speculative nature of this spin-off is why AT&T is priced to low. But, for those who’re bullish on the prospects of this media company competing against the entrenched players in the media space, AT&T shares could represent a compelling opportunity in the present.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long T and DIS. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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