AT&T has had an absolutely horrendous last few years. The management tried to delve into the entertainment industry hoping to generate growth for it’s investors and the move spectacularly failed. A new CEO John Stankey took over the leadership in 2020, spun off its loss making entertainment business, and with AT&T’s Warner Media merging with Discovery in April 2022, concluded AT&T’s foray into the entertainment business and now the company is solely focused on its core business – Wireless Communications and 5G Broadband.
This foray has laid a pile of debt on the company, as a result the company’s valuation stayed same in terms of EV/EBITDA but came down on a P/E basis. Now as the company pivots and brings down its debt levels after divestiture and using cash from continued operations, the valuations of the company should move back to historical norm, wherein EV/EBITDA stays the same but P/E goes up. This move implies that the equity valuation of the company should move higher.
Why did the stock price go down so much?
The fed giveth and the fed taketh away. AT&T set its annual dividend to $1.11 per share. As a dividend yield play AT&T only needed to yield 4% when US10Y was almost zero to make it a good dividend play. However as fed increased the prime rates to 4%, the risk of owning equity meant AT&T needed to yield a significantly higher yield of about 7% for compensating for owning public equity vs govt Tbonds. Therefore AT&T price had to come down to reflect that higher yield. After September quarter’s sell off – AT&T now yields 7% as dividend, and a 13% FCF yield.
This implies AT&T has ample room to maintain its current dividend policy* (getting paid while you wait) and bring down its debt levels which in turn should increase the equity value of the company (to make money).
*Please note dividend has been cut down by 44% in April of 2022 due to divestiture of Warner Media.
Is this a buy now?
While the technical do not yet suggest an entry point, the fundamentals, and valuations (0.9x book, 6.5 ntm p/e) are a screaming buy. Management has just declared quarterly dividend, and the dividends are payable on November 1, 2022, to stockholders of record of the respective shares at the close of business on October 10, 2022. The only technical which might help is that RSI is under 30, which does imply it might limit the immediate downside.
The additional kicker to my thesis is the fact that AT&T has had net postpaid subscriber growth in the last two quarters and is well on its way to achieve the same in the 3rd quarter of 2022. If we can get 3% earnings growth, then that would mean a 10% return on your investment while you wait for the company to turn the ship around.
Personally, I believe ATT can go back to trading at 10x forward implying an easy 50% upside from current levels purely based on financial dynamics and restructuring of the company, and if the management is able to achieve it’s new targets then there is a 100% upside. In either scenario an investor still makes 7% on your investment as dividend income.