Stock of the Week

AT&T

August 5th 2020

AT&T
NYSE Symbol: T
Industry: Telecommunications
Price of 8/3:  $29.62

 

The coronavirus pandemic has created unprecedented government stimulus programs to support the economy. Congress has passed $2 trillion in rescue efforts even as they continue to squabble over doing more. The Federal Reserve is all in with rate cuts and a slew of credit and lending programs that could inject more than $6 trillion into the economy. The Federal Reserve programs are far and away bigger than anything the central bank attempted during the financial crisis, announcing them in much less time as well. The downside to all these moves has been interest rates moving closer to zero pushing more investors into the equity markets for income. This week we will highlight one of the oldest publicly traded US companies with insider buying. The featured stock is AT&T with one of the best dividends at over 6% among any large cap stocks. 

The 143-year-old company has become a consistent underperformer making a number of bad acquisitions over the years including a $49 billion purchase of Direct TV in 2014. On top of that, consumers are shifting spending habits to more streaming options instead of traditional cable bills.

To combat this, AT&T has shifted their focused to improving using their cash flow to reduce debt while also growing their profitable businesses. In their earnings report last week, AT&T reported free cash flow of $7.6 billion for the quarter down 14% from a year earlier, but well ahead of Wall Street's $5.4 billion forecast. AT&T is projected to generate $30 plus billion in free cash flow with the expectation to boost cash flow closer to $40 billion in the coming years. AT&T is also using the low interest rates to retire more expensive debt and refinance other debt maturities to create greater financial flexibility while also improving their credit quality. AT&T is also looking to sell off nonstrategic assets. Currently AT&T is shopping their Warner Brothers gaming division with a reported price tag of $4 billion.

Regarding their growth initiatives, AT&T is focused on their wireless business which remains a cash cow for the company. The rollout of 5G should expand customer loyalty with less churn. With the start of the third quarter AT&T will now cover roughly two-thirds of the U.S. population with 5G.

AT&T is also touting their new streaming service called, HBO Max. The streaming service combines HBO with Warner Media content. Subscribers have grown to 4.1 million since the launch on May 27th. Combined, HBO and HBO Max now reach a total of 36.3 million U.S. subscribers. AT&T's goal to reach 50-55 million HBO Max subscribers in the U.S in the next five years. AT&T will also rollout of a lower-cost International streaming service within the year providing another growth avenue.  

Wall Street doesn't seem to be giving AT&T much credit for all their initiatives as the valuation of the stock remains low. At least one insider agrees as a director purchased 100,000 shares last week at $29.615 to $29.83 a share for a total value of $2.97 million. With the initiates by management at AT&T, the dividend seems to be more secure for now. AT&T is pegging the dividend at 60% of their cash flow. Currently the dividend is only 50% of cash flow allowing for room for hikes in the future. If AT&T can get their debt burden down, improve their credit rating and expand their business and cash flow, the stock could have good capital appreciation potential to go along with the 6% annual dividend.