There is no question AT&T has become a complex combination of businesses. Its communications segment makes up roughly 79% of revenue and includes wireless phone service, residential broadband, and voice and data services to businesses. The WarnerMedia segment, which accounts for about 17% of revenue, is responsible for film and television content from well-known providers Turner, HBO, and Warner Bros. There is also a Latin American segment and an advertising services segment named Xandr. Together, all the business segments generated $173 billion in revenue in the 12 months ended in September, a 5% decrease from the previous 12-month period. The drop was largely due to the lack of movie and television releases, as well as the associated lost advertising revenue due to the pandemic.
The largest business segments are the results of two megadeals that expanded the company and added a ton of debt to its balance sheet. In 2015, AT&T completed the acquisition of DIRECTV for $48.5 billion, becoming the world’s largest pay-TV provider. At the time, the combined business served 26 million customers in the U.S. That number had collapsed to less than 18 million at the end of September as cable subscribers cut the cord in favor of programming viewed directly over the internet.
Reports have been circling for months that AT&T is looking to unload a minority stake in DIRECTV but has turned down offers it considered too low. The jury is still out on the 2018 acquisition of Time Warner for $85 billion that left the company with $180 billion in debt but brought in the content for the company’s HBO MAX streaming service.
Now that AT&T has the assets to offer both connectivity and content, it’s up to new CEO John Stankey to put the company’s prodigious cash flow to work and find a balance between investing for the future, paying off debt, and keeping up the streak of 36 consecutive years of dividend raises.
Cash is king
The balancing act won’t be easy, but there is enough cash coming in the door to allocate capital in all directions. Management expects to generate $26 billion in free cash flow this year. That is less than the $29 billion in 2019, but COVID-19 disruptions affected the first half of 2020. The trend turned around in the third quarter, which ended Sept. 30, when free cash flow increased to $8.3 billion up from $6.2 billion last year. The quarter also saw subscriber growth in both wireless and broadband, areas that are crucial to generating the cash necessary for investments and dividends.
Stankey believes the company has plenty of flexibility and laid out the math to analysts in early December, saying, “… if you think about $26 billion of free cash flow into ’21, about $21 billion of capital, and then you think about the things that we want to do in our business, we feel really good. We’re in a position to be able to fund and commit to those things that are important.”
One of the important things he mentioned was sustaining the dividend. He also mentioned “opportunities to do some things around rejiggering our portfolio that can accelerate some of that restructuring of the balance sheet” for even more room to breathe.
The company has already lowered the cost of its debt financing and the average interest rate on the company’s debt is now at 4.1%, the lowest it has ever been. But investors clearly have their doubts that the recipe is sustainable, as shares trade at the lowest multiple to free cash flow in at least 20 years.
Solving the equation
Ultimately, the question of whether AT&T will make a good investment for retirees will come down to Stankey’s ability to sustain revenue in a world where more customers are shunning cable television. It’s understandable that Wall Street is skeptical. Long-term debt stands at $159 billion and the dividend has been raised only a penny each year since 2008 with the aforementioned lack of increase so far for 2021.
Those are legitimate strikes against the stock, but the best investments aren’t usually easy to make. The key is seeing that a struggling business is turning around. Often that can be easier to see, and believe, under new leadership. Stankey only took over as CEO in July, but the green shoots of change are starting to become visible. More than 1 million wireless subscribers were added in the third quarter, as well as 350,000 net additions for the company’s fiber internet service. Those numbers dwarfed rival Verizon, which added 142,000 wireless and 144,000 fiber customers in the same quarter. Also, the company’s HBO MAX streaming service was at 57 million global subscribers as of October 2020, well beyond management’s initial target for the end of the year.
The CEO has said sustaining the dividend is a priority, AT&T is priced at a historically low multiple of free cash flow, the company is successfully managing its debt, and seeing subscriber growth in streaming, wireless, and fiber. A dividend increase for 2021 isn’t off the table either. The company can maintain its streak of yearly increases as long as the payout is bumped by the fourth quarter.
Retirees looking for high yield should consider adding AT&T to their portfolio. As long as the company generates current levels of free cash flow, management has laid out a road map for continued dividends and possible stock appreciation once Wall Street gains confidence in the plan.
AT&T Inc. is a holding company. The Company is a provider of telecommunications, media and technology services globally.
The Company operates through four segments: Communication segment, WarnerMedia segment, Latin America segment and Xandr segment.
The Communications segment provides wireless and wireline telecom, video and broadband services to consumers.
The business units of the Communication segment includes Mobility, Entertainment Group and Business Wireline. The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats.
The business units of the WarnerMedia segment includes Turner, Home Box Office and Warner Bros. Latin America segment provides entertainment services in Latin America and wireless services in Mexico. Viro and Mexico are the business units of the Latin America segment.
The Xandr segment provides advertising services.
Overall, the bias in prices is: Sideways.
The projected upper bound is: 30.51.
The projected lower bound is: 28.05.
The projected closing price is: 29.28.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 20 white candles and 30 black candles for a net of 10 black candles.
An engulfing bearish line occurred (where a black candle’s real body completely contains the previous white candle’s real body). The engulfing bearish pattern is bearish during an uptrend. It then signifies that the momentum may be shifting from the bulls to the bears.
If the engulfing bearish pattern occurs during a downtrend (which appears to be the case with AT&T), it may be a last engulfing bottom which indicates a bullish reversal. The test to see if this is the case is if the next candle closes above the bottom the current (black) candle’s real body.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 76.2063. This is not an overbought or oversold reading. The last signal was a buy 5 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 51.35. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 16 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 11 period(s) ago.
Rex Takasugi – TD Profile
AT&T closed down -0.180 at 29.260. Volume was 62% above average (neutral) and Bollinger Bands were 62% wider than normal.
Open High Low Close Volume 29.500 29.745 29.200 29.260 15,115,043
Technical Outlook Short Term: Neutral Intermediate Term: Bearish Long Term: Bearish
Moving Averages: 10-period 50-period 200-period Close: 28.79 28.78 29.41 Volatility: 23 27 35 Volume: 10,274,872 9,714,941 9,286,148
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
AT&T is currently 0.5% below its 200-period moving average and is in an downward trend. Volatility is high as compared to the average volatility over the last 10 periods.
Our volume indicators reflect volume flowing into and out of T.N at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on T.N and have had this outlook for the last 7 periods.