Deathstar Logo Now Seems Apt as AT&T Is the Ultimate Value Destructor
It’s been nearly 38 years since AT&T (NYSE:T) became a stand-alone stock, replete with its “deathstar” logo, after the telecom giant was split into seven smaller telecom companies as part of one of the biggest antitrust cases in U.S. business. The classic $10,000 invested then would be worth $3.55 million today.
Not bad for a company that dates back to 1877, when Alexander Graham Bell founded the Bell Telephone Company. AT&T was created in 1885 as Bell’s long-distance subsidiary. In 1899, AT&T swallowed Bell.
An interesting article from May 1996 lays out some of the details of the breakup. I recommend you read it if you’re unfamiliar with the entire AT&T backstory. It’s fascinating to this student of business history.
Beyond that 355% gain in T stock since the breakup, Investopedia characterizes the move as successful. I’m not nearly as sure. So if you own AT&T stock, please don’t get nostalgic about the past. The company’s stock is down almost 20% year-to-date.
If you’re thinking of buying, AT&T’s history suggests it will continue to break your heart. Here’s why.
T Stock and Its Value Destruction
Yes, that 355% is an impressive number, but measured on an annual basis, not so much. T stock’s appreciation from Jan. 1, 1984 — the effective date of the breakup — through Dec. 1, 2021 is slightly less than 4% a year. The S&P 500 index delivered a compound annual growth rate of 9.85%, 590 basis points higher than AT&T.
While neither return includes dividends, I think it’s safe to say that T stock hasn’t delivered the goods, no more valid than in recent years when it fancied itself a media empire by buying and then spinning off (yet to be completed) Warner Media.
In fairness, the latest chapter story has yet to be written. Discovery Communications (NASDAQ:DISCA, NASDAQ:DISCB, NASDAQ:DISCK) may take Warner Media and turn the entire media conglomerate into a real money maker.
However, none of that will have been accomplished by either former AT&T CEO Randall Stephenson or current CEO John Stankey. Both were high-level executives when the company pulled the trigger on its $85 billion deal in 2018.
“A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that,” CNBC reported Stephenson saying at the time. “We intend to give customers unmatched choice, quality, value and experiences that will define the future of media and communications.”
Value destruction at its best.
Maybe Not the Best Telecom Play
In July 2018, I wrote an article entitled, The 7 Reasons AT&T Is Going to Blow the Time Warner Merger. While I wasn’t the only stock pundit blowing his horn over the deal’s stupidity, I don’t think I’ve ever been so adamant about an acquisition being a mistake as I was with AT&T.
“While the odds of a merger succeeding are much higher than winning a lottery — KPMG estimates that about one-third of mergers in North America add value — AT&T shareholders ought to lower their expectations for success,” I wrote in 2018.
“KPMG also found that nearly 70% of mergers in North America either deliver zero value to shareholders or reduce it.”
Now, when you consider the Warner Media deal was a whopping $85 billion, AT&T was putting an impossible amount of pressure on itself at a time when it should have been focusing on 5G.
Ultimately, the deal added way too much debt without proving the synergies and cost savings it boasted it would find when it first announced the massive acquisition in 2016.
In September, I suggested that AT&T wasn’t even the best wireless buy. Instead, I highlighted Cable One (NYSE:CABO), a broadband provider with more than 1.1 million residential and commercial customers in 24 states. Highly profitable, it’s seriously outperformed T stock over the past five years, with CABO increasing 213% versus a decline of more than 40% for the AT&T share price.
As I write this, Cable One’s gotten hammered in 2021, down 20.0% YTD. That compares to 13.4% decline for AT&T. However, Cable One’s five-year annualized total return is 25.2%, nine times better relative to AT&T.
Free cash flow (FCF), a financial metric I follow closely, also reveals the difference in companies. AT&T’s trailing 12-month FCF is $25.7 billion. Based on TTM revenue of $173.6 billion, it has an FCF margin of 14.8%. Cable One’s FCF margin is 23.8% [based on FCF of $360 million and TTM revenue of $1.51 billion], 900 basis points higher.
Cable One’s current debt is $3.9 billion, or 37% of its market cap. AT&T’s debt is 127% of its market cap, or 4x higher.
As I said, it’s not even the best telecom play.
Bottom Line
In the future, I will calculate the total return of all seven “baby” Bells from 1984 through the ultimate conclusion. Even then, I think I’ll find AT&T remains a dog’s breakfast. Approaching a 10% yield, don’t be fooled by the dividend. I wouldn’t touch T stock until it was trading in the mid to low-teens.
AT&T is the ultimate value instructor.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
