T with Nobias technology: After Years of Underperformance, Are AT&T Shares Ready To Rebound?
AT&T (T) has been an under-performer for awhile now, in terms of share price performance. T shares are down 1.91% year-to-date, down 15.89% during the last year, down 41.69% during the last 5 years, and down 19.14% during the last 10 years. For comparison’s sake, it’s important to note that the last decade has represented a very strong bull market rally period. The S&P 500 is up 90.26% during the last 5 years and 227.82% during the last decade. In short, AT&T shares have sat out this strong rally, which has disappointed many of its shareholders.
Furthermore, the company recently announced a dividend cut and many question marks still surround the company and its upcoming spin-off of its Warner Media division after its merger with Discovery Communications. In short, for decades this telecommunications company was known for its slow, steady, and predictable earnings growth (and dividends). That has all changed in recent years. And yet, because of its massive share price underperformance, we’ve seen many bullish opinions recently expressed regarding the stock because of the intriguing value that T appears to present.
AT&T reported its fourth quarter/full-year earnings in late January, and Graham Grieder, a Nobias 5-star rated analyst, wrote this article, highlighting the results. Grieder began his piece saying, “Well, the day started pretty good. AT&T reported Q4 EPS at $0.78, which was a beat by $0.03, and revenue of $41 billion, which was a beat of $550 million.”
T Feb 2022
Regarding the company’s operating segments, he wrote, “While we did see Business wireline revenue fall 5.6%, we did see that offset by Mobility (+5.1%), Service (+4.6%), and Consumer Wireline (+1.4%) revenues. As for WarnerMedia, we saw revenues jump 15.4% to $9.9 billion.”
For the full-year, AT&T produced adjusted earnings-per-share of $3.40, which represented 7% y/y growth, compared to 2020’s $3.18/share total. This growth was great to see for the bulls; however, the fact is, 2021’s $3.40/share EPS figure was still below AT&T’s pre-pandemic 2019 full-year EPS total of $3.57.
During 2021, we’ve seen many blue chip companies grow to the point where their fundamentals are now above the pre-pandemic levels. AT&T is not in this boat and therefore, investors looking at growth are still largely disappointed. Grieder touched upon 2022 EPS guidance, saying, “Consolidated EPS is expected to land anywhere from $3.10 - $3.15 per share.” He continued, quoting AT&T’s CFO, Pascal Desroches’ commentary in the Q4 earnings conference calling, saying that the future guidance was being justified by: “This guidance reflects WarnerMedia's declining contributions due to anticipated investment initiatives, a 200 basis point increase in our effective tax rate and no anticipated investment gains. We also expect adjusted equity income contributions from DIRECTV to be about $3 billion for the year. Look for more details on our earnings outlook during our upcoming virtual analyst event.”
Now, it’s important to note that this negative y/y guidance appears to take into account the Warner Media spin-off, which is expected to occur during 2022. Therefore, the results might not be as bad as they first appear (because they’re not apples to apples comparisons). But, the downside with the spin-off for investors is definitely the loss of cash flows which has inspired management to cut AT&T’s dividend.
Grieder quoted AT&T’s CEO, John Stankey, who spent time during the conference call highlighting the company’s forward looking, post spin-off dividend. Regarding Stankey’s comments, Grieder wrote, “He followed that up with this comment with regards to the dividend after reiterating that the payout would be $8 billion-$9 billion.” He quoted Stankey, who said, "anywhere in that range, even if it's at the low end of that range ... the yield on AT&T's dividend and the restructuring of the business will be in the 95-percentile range of yields of dividend-paying stocks in corporate America."
There are certainly a lot of moving parts in play with AT&T right now. The company is clearly attempting to re-invent itself. It’s cutting its dividend, focusing on its balance sheet, and spinning off its media operations so that it can get back to its core focus on telecommunications. This makes it hard for investors to analyze the company, which has likely factored into AT&T’s recent all-time low valuation, of approximately 7x blended earnings.
With this in mind, AT&T has transformed from a blue chip dividend stock into a deep value play. And, it appears that Grieder likes the risk/reward associated with shares moving forward. To conclude his piece, he said, “After fairly good earnings, and good guidance, the stock tanked on indecision with regards to the spin/split-off. I do think if they would have come out one way or the other the stock would still sell-off, but as investors are being forced to guess as to what the compensation will look like, they would rather take the sure thing which is cash.” He recommended that investors stay patient because of the recent share price weakness, rather than giving into fear and selling at the bottom.
After acknowledging the uncertainty surrounding AT&T shares, Grieder said, “I do remain bullish long-term on AT&T and I do think the stock appreciates from here eventually, but today was a setback that will take some time to repair.”
The Value Investor, a Nobias 5-star rated author, also recently covered AT&T’s Q4 report. They said, “AT&T had 3.2 million postpaid phone adds and 1 million new fiber subscribers during the year, adding billions in additional revenue. It also added 13 million new HBO Max subscribers showing the strength of a subscription base that'll soon be passed to the Time Warner + Discovery spin-off. The company has shown a continued ability in volatility to grow subscribers.”
The Value Investor also touched upon T’s dividend expectations, saying, “AT&T expects a $8-9 billion annual dividend payout which is a ~40-40% dividend payout ratio. Post Discovery + Time Warner spin-off, it's still expected to have a respectable dividend of roughly 6.5%.” And, potentially most importantly, The Value Investor highlighted what the dividend cut and the future cash flow expectations mean for the company’s balance sheet. They wrote, “The company has announced an initial financial target of reducing net debt to 2.5x adjusted EBITDA by the end of 2023. The company is targeting roughly $95 billion in long-term debt. The company will have roughly $110 billion in post-spin-off debt indicating an intention to pay off ~$7.5 billion worth of debt per year.”
Looking forward, The Value Investor touched upon their bullish opinion surrounding cash flow potential saying, “From 2022 to 2023, the company should be able to generate roughly $43 billion in FCF. The company has earmarked roughly $15 billion for debt paydown and $17 billion for dividends. That already implies a high single digit shareholder yield. The company hasn't said how it'd spend the other $11 but it could repurchase several % of shares annually.”
And therefore, they concluded their report with a bullish stance, saying, “The company will spend roughly 40% of the FCF on debt reduction and 40% on dividends for the next two years. That'll enable it to consistently improve its financial position. The company can still buy back shares; however, whatever it does with its FCF, it has a unique ability to generate substantial long-term shareholder rewards.”
The Value Pendulum, a Nobias 4-star rated author, recently posted an article at Seeking Alpha which highlighted HBO/HBO Max subscriber growth. This growth is very important for the eventual value of the Warner Media/Discovery Communications spin-off. We just saw Netflix sell off precipitously because of missed subscriber growth guidance. Therefore, investors are going to want to see strong results for Warner Media’s properties moving forward.
The Value Pendulum said, “As part of the company's Q4 2021 financial results announcement released in late-January 2022, AT&T disclosed that it has 73.8 million HBO & HBO Max subscribers worldwide as of December 31, 2021. This was higher than the company's prior management guidance for 70-73 million HBO & HBO Max subscribers in 2021.” They continued, “In terms of growth, T's HBO & HBO Max subscribers increased by +21.7% YoY and +6.3% QoQ, respectively in the fourth quarter of last year. Specifically, AT&T achieved net new HBO & HBO Max subscriber additions of approximately 13.1 million for full-year 2021, and it highlighted at its Q4 2021 earnings call this growth in subscribers for 2021 was "more than any year in HBO's history."
With regard to a direct comparison to Netflix, The Value Pendulum wrote, “In the recent fourth quarter of 2021 (calendar year), Netflix added 8.3 million net new subscribers to bring its global subscriber base up to 221.8 million as of end-2021, while AT&T added 4.4 million net new HBO & HBO Max subscribers worldwide over the same period.” However,” they continued, “it is a different story when one focuses solely on the domestic market. T managed to grow its domestic HBO & HBO Max subscriber base by +1.6 million in Q4 2021, while Netflix boasted relatively lower net new subscriber additions of +1.2 million for the US and Canada markets in the recent quarter.”
In short, it appears that HBO’s business remains strong in the U.S. (which is where the streaming players typically generate their highest revenue per user) and therefore, this could allow AT&T’s media spin-off to begin trading on the right foot once the 2022 spin-off occurs. While so much of the market’s focus lately has been on the AT&T/Discovery deal, the fact is, telecommunications remain the backbone of this company’s operations.
With that in mind, a recent report published by Daniel Jones, a Nobias 5-star rated author, highlights the slow and steady growth that AT&T’s communication segments produced in 2021. “First and foremost,” Jones wrote, “I am a huge fan of the Connected Devices portion of the business.” When discussing this business segment, he said, “That growth is beginning to slow, but it is positive nonetheless. In the latest quarter the company reported, it had 90.98 million Connected Devices in operation. This compares to the 87.50 million reported one quarter earlier and it is up from the 75.97 million the company had in the third quarter of its 2020 fiscal year. It will be intriguing to see whether growth is slowing down now or whether it can ultimately pick up.”
Jones continued, highlighting AT&Ts Connected Devices segment, saying, “Growth here has been even slower than it has been on the Connected Devices front, but it is a key portion of the business. At the end of the latest quarter, the subscriber count under the Postpaid category came out to 80.25 million. This was up marginally from the 79.06 million seen one quarter earlier and compares to the 75.97 million generated the same time last year.”
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.
Jones concluded his piece with cautious optimism, saying: “Right now is an exciting time to be watching AT&T. The company continues to push on to reinvent itself and there seem to be plenty of opportunities for investors to buy in for the long haul. As I detailed in a prior article, shares of the business are likely significantly underpriced. But of course, valuation can change based on market conditions and based on the conditions of the company in question. And this latter point is something that we have to reassess each and every quarter. If some bad news develops on any of the aforementioned items, it could serve to torpedo what currently looks like a great investment opportunity. On the other hand, this data could reaffirm the conglomerate as an excellent prospect for value-oriented investors for the years to come.”
Looking at the credible authors and analysts that the Nobias algorithm tracks, there is a strong bullish lean when it comes to AT&T shares. Right now we see that 93% of recent commentary by 4 and 5-star rated authors has included “Bullish” sentiment. Furthermore, the average price target being applied to AT&T shares right now amongst the Nobias 4 and 5-star rated Wall Street analysts is $32.75.
Today, AT&T shares trade for just $24.13. This means that the average price target mentioned above represents upside potential of approximately 35.7%. And, that doesn’t include the company’s high dividend yield. In short, when looking at the Nobias community’s collective opinion on this stock, it appears that strong total returns moving forward are likely. Without a doubt, AT&T has been a poor stock to own for quite some time. But, it’s clear that the credible authors/analysts that we track likes the risk/reward proposition here with shares trading so cheaply.
Disclosure: Nicholas Ward is long 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.
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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.