AT&T Stock Investors Aren’t Likely To Lose (Or Make) A Lot of Money
AT&T (NYSE:T) stock looks like a safe investment as fall begins in the U.S. At about $27.35 per share, it has a market cap of $194 billion. You’re unlikely to lose a lot of money. But you’re unlikely to make a lot.
Don’t be fooled by the supposed dividend yield of 7.54%. The dividend will shrink about 60% as its deal to make Warner Media into Warner Discovery is completed some time next year.
But there is safety in a shared monopoly. That’s what AT&T Wireless has, along with Verizon Communications (NYSE:VZ) and T-Mobile US (NASDAQ:TMUS). That’s what a long-term investor is buying today.
Cutting the Cord, Cutting the Debt
AT&T Wireless should remain a cash flow machine. There was $43 billion in operating cash flow during 2020. The business is expected to generate $20 billion in free cash flow each year.
Because Verizon and T-Mobile are also debt-ridden, there will be no relief from America’s high broadband prices. But there should be debt reduction for AT&T after Warner Media and DirecTv are off the books. DirecTv, a satellite broadcaster, was thrown in with AT&T’s UVerse cable business and moved to private equity in a deal similar to the Discovery transaction.
AT&T shareholders will get shares representing majority stakes in DirecTv and Warner Discovery after the deals close. That means if you own AT&T today, you’ll get tradeable shares in the new companies. Discovery (NASDAQ:DISCA) is down 5% since the deal was announced.
But for now you’ll still have a rooting interest in moves like HBO Max cutting prices to take control of its streaming customers away from Amazon (NASDAQ:AMZN). Just don’t expect any more tickets to the Oscars or Emmys.
Full Focus on Wireless
The main result of these deals is that AT&T’s debt should fall below $120 billion, for now. AT&T has already turned its full attention to wireless and has sold ancillary assets like CrunchyRoll, Playdemic and Vrio. Your true yield after the dividend cut will be 4.5%. Only 40% of free cash flow will be devoted to the payout after the deals go down.
There can’t be much more relief because AT&T will be spending billions of dollars building out 5G services. The company is already moaning about its competitive position. It is asking for “guardrails” on rivals buying more spectrum. It’s going to court against the use of 6 GHz frequencies for WiFi. The moves are meant to hobble T-Mobile and that stock is the better buy, with a price-to-earnings ratio of 43. Just don’t underestimate AT&T’s lobbyists.
Analysts expect AT&T to earn $3.36 per share in 2022, giving it a forward PE of just 8x, against a market average of 22x. But the earnings will be cut 20% in the spin-offs, so that forward PE would be 10x. That’s still cheap, but the company is only expecting earnings growth in the mid-single digits after the deals.
The Bottom Line on T Stock
If you’re buying T stock today, you’re buying stock in three companies. You’re buying the wireless company, whose financial position is like that of rivals Verizon and T-Mobile. You’re also getting stock in DirecTv and Warner Discovery.
The best reason to buy is speculation that the parts wind up being worth more than the whole. That may be the case. Just remember you’re losing more than half your dividend along the way.
At some point, probably in 2023, financial gold will start flowing out of the 5G mine as capital outflows slow and business returns to normal. Is AT&T now smart enough to keep its nose to the grindstone and not go haring off into some other insane direction? If it is, you can make that speculation and sell them the pieces at your leisure.
On the date of publication, Dana Blankenhorn held long positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
