AT&T (T) is a name that everyone already knows. You might think it’s a boring pick. But when the situation is right, these familiar names can generate surprising upside, suggests Frank Curzio, editor of Curzio Research Advisory.
AT&T is coming off a rough year and investors have turned bearish on the communications giant. Short-sellers say the company is bleeding subscribers. They say it has too much debt and will need to slash its dividend.
This negativity is wrong. AT&T’s dividend payout ratio is 57%. In other words, its earnings easily cover its current dividend payments to investors.
There’s no need for AT&T to cut its dividend. In fact, I wouldn’t mind seeing the company cut the dividend in half and use that cash to invest in its entertainment division.
Digging deeper, AT&T has $187 billion in total debt (vs. $10 billion in cash). But the vast majority of its debt is long-term. If you look at its payment schedule, it needs to pay off $10-$11 billion in debt each year. Over the next three years, the company should easily generate over $75 billion in free cash flow.
This cash flow comes from AT&T’s massive subscriber base, which includes nearly 200 million customers across its wireless and broadband businesses.
Meanwhile, AT&T is in a handful of solid growth markets. It’s one of the biggest 5G players — with one of the best wireless networks in North America. It’s also building out a high-speed fiber network, with over 4 million customers already.
Most importantly, AT&T has tremendous entertainment assets. Its WarnerMedia unit includes the legendary studio Warner Bros. HBO Max gives the company an established streaming platform with 57 million subscribers — an impressive number considering it launched barely 6 months ago.
The company recently announcing it will release all of its 2021 movies on HBO Max, which I think is a fantastic long-term strategy.
In short, AT&T is in the right growth markets. And yet its shares trade at a P/E ratio of 13 times next year’s earnings expectations. That’s an absolute steal. We’ll start by buying a 1/2 position. We want to own this name for a long time — so this gives us room to scale into a full position over time.
