T with Nobias technology: Is AT&T A Buy Trading With Its Lowest Price-To-Earnings Multiple In Decades?
For decades, AT&T (T) has been a favorite stock amongst income oriented investors and retirees who rely on the high dividend yield that the company has traditionally provided. Up until very recently, AT&T was considered to be a dividend aristocrat, which meant that the company had not only maintained its annual dividend, but increased its annual payments to shareholders for at least 25 consecutive years.
Coming into 2021, AT&T was on a 36-year annual dividend increase streak, which speaks towards the high quality and reliable nature of its dividend yield. And yet, this all changed earlier in the year when management announced that it would be merging with Discovery Inc. (DISCA) and then spinning off the companies combined media/entertainment assets (AT&T owns Warner Media, which includes the HBO franchise as well). As a part of this spin off, AT&T is projected to cut its dividend by anywhere from 40-50% from current levels.
Therefore, this upcoming cut alongside with management’s decision to freeze its dividend (AT&T has made a $0.52/share quarterly dividend payment for 8 quarters in a row now) means that the company’s annual increase streak is officially over and the company has lost its vaunted dividend aristocrat status. With all of that in mind, while it’s true that AT&T shares yield an impressive 8.87% right right now, this yield is misleading because by early 2022, the yield will be much lower after the spin-off and dividend cut.
T Dec 2021
Michael Foster, a Nobias 4-star rated analyst, touched upon this in a recent article, saying, “First, back to Ma Bell: sure, she yields a high 8.4%, but the stock is one of the biggest yield traps on the market! AT&T shares have actually posted an 8.5% loss in the last year, with dividends included. This at a time when the S&P 500 returned more than 31%.”
Ma Bell refers to AT&T’s former parent company, Bell Systems, which dominated the North American telecom market from 1877 to 1983 when it was forced to break up for anti-trust reasons. Investors still remember the power of this company and refer to AT&T as Ma Bell, or “Mother Bell”. For years, this was an affectionate term, but as you can see by the Foster quote from above, it’s now being used in a rather ironic tone more often than not.
AT&T shares have experienced another leg down in their 2021 sell-off since Foster published his report on November 22, 2021 and now, on a year-to-date basis, AT&T shares are down 18.43%. This means that even with the company’s hefty dividend factored into its total returns, AT&T has still produced performance which is down double digits in a year where the broader market is up nearly 25% with dividends factored in.
While it’s true that T shareholders have suffered in a big way throughout 2021 thus far, the market isn’t about what has happened in the past, it’s about what happens in the future. And therefore, the most important question surrounding AT&T right now isn’t “what have you done for me lately?” It’s, “What can you do for me in the future?”
Richard Bowman, a Nobias 5-star rated analyst, recently published an article titled, “AT&T (NYSE:T) looks Undervalued but Uncertainty Could lead to Further Downside” where he attempts to look at the bull/bear picture that AT&T shares present over the next year as the merger/spin-off looms. He began by pointing out 4 potential downside risks that AT&T presents shareholders, even after its poor 2021 performance.
Bowman listed them as:
“AT&T plans to merge WarnerMedia and Discovery ( Nasdaq:DISCA) and spin off the combined entity to its shareholders. There is uncertainty about exactly what shareholders will receive in this deal, and Discovery’s share price has already fallen 30% since the deal was announced.”
“The company has a very high level of debt (the debt to equity ratio is 100%), and it’s not entirely certain where all the debts will end up after the assets are spun off.”
“The idea is for AT&T to focus on 5G and broadband going forward. But there isn’t a compelling growth strategy and the execution over the last 10 years has been poor.”
“The prospect of rising interest rates would make the lower dividend yield less attractive than other assets.”
Bowman continued, saying, “AT&T will still generate a lot of cash in the next few years and the reduced dividend yield will still be more attractive than most other shares. But the growth prospects don’t look exciting, and there’s a reasonable chance current shareholders will continue selling their stock, or sell as soon as they receive their WarnerMedia/Discovery shares.”
But, he also notes that ongoing weakness here could represent an intriguing opportunity for long-term investors. Why? Well because AT&T shares are incredibly cheap right now. AT&T is expected to generate $3.36 in earnings in 2021, which means that at its current ~$23.50 level, T shares are trading for just 7x 2021 expectations. Over the last 5, 10, and 20 years, AT&T’s average price-to-earnings ratios have been 10.9x, 12.65x, and 13.95x, respectively.
It’s unclear as to whether or not the company will be able to hit management’s guidance post-spin off. During AT&T’s investor presentation regarding the Discovery deal, management called for the new 5G/fiber focused telecom company to be able to generate low single digit revenue growth, mid-single digit adjusted EBITDA growth, and mid-single digit earnings-per-share growth, from 2022-2024. But, if this is the case, then investors buying shares today, at their lower prices in nearly 2 decades, are potentially setting themselves up for strong returns.
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.
As Bowman points out, there is still a lot of speculation surrounding this spin-off and management’s ability to execute moving forward. However, when looking at the Bull/Bear opinion of the credible authors tracked by the Nobias algorithm, it’s clear that there is a desire to buy this historic dip.
Any sort of mean reversion, with regard to AT&T’s earnings multiple expanding back towards historical averages, would push the share price significantly higher. And, it appears that the authors and analyst tracked by the Nobias algorithm recognize this. Right now, 93% of the credible authors that we track are expressing a “Bullish” opinion on shares. And, when looking at the credible (4 and 5-star rated) Wall Street analyst that we track, the average price target for AT&T shares is currently $33.00. Today, AT&T trades for $23.46, which means that this average price target represents upside potential of approximately 40.7%.
It’s clear, when looking at these estimates, that the credible analysts that we follow believe that the pessimistic sentiment surrounding the company and its upcoming dividend cut is irrational. Therefore, the opinions expressed by the experts that we track point towards strong total returns moving forward once the market’s fear wears off and investors once again begin to focus on the underlying fundamentals that AT&T produces.
Disclosure: Nicholas Ward is long AT&T. 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.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.