Since adding telecom giant AT&T (T) to our Income Portfolio in 2014, it has steadily paid out high dividends like clockwork. However, its share price gradually diminished as the company took on debt to finance expensive acquisitions, observes Jim Pearce, chief investment strategist at Investing Daily's Personal Finance.
That prompted a public letter sent to AT&T’s board in September 2019 by Elliott Management, a private equity firm that owned more than $3 billion of AT&T common stock at the time. In the letter, Elliott demanded that the company exercise fiscal restraint by narrowing its strategic focus.
However, turning around a battleship the size of AT&T takes time and last year was mostly spent reacting to the coronavirus pandemic. Recently, the company announced several measures it will take to pare down its debt load while emphasizing its higher-margin businesses.
One of those measures is offloading its DIRECTV business into a partnership with TPG Capital. After the deal closes (expected during the second half of this year), AT&T will own 70% of the new entity and TPG will own 30%.
As its nationwide build-out of a 5G (fifth generation) network nears completion, AT&T will add 3 million customers to its existing base of 14 million high-speed connections.
At the end of last year, roughly 80% of AT&T’s customers were paying for either a fiber optic or VDSL (very high bit rate digital subscriber line) plan. With more Americans working from home as a result of the pandemic, those connections could prove more valuable than initially planned.
In addition to the income AT&T will receive from the DIRECTV entity once that deal closes, the company expects to increase revenue from its HBO Max subsidiary. Later this year, the company will offer its HBO Max service in 60 urban markets in Latin America and Europe.
The company is now projecting HBO/HBO Max subscribers in a range of 120 million to 150 million by 2025, a more than 50% increase over its initial guidance of 75 million to 90 million from October 2019.
If all goes as planned, AT&T expects consolidated revenue to increase slightly this year and then accelerate each year thereafter.
The rate of growth will in large part depend on the adoption rate for 5G plans, which is why the company is investing heavily in the completion of its nationwide network. To that end, AT&T is expanding its 5G network to include sports arenas, hotels, airports, hospitals, and schools.
Ironically, these changes come about six months after Elliott Management finally lost patience with AT&T and sold its stake in the company.
On the day Elliott presented its list of demands to AT&T, its stock was trading near $36. Now priced around $30, AT&T is valued at less than 10 times forward earnings and pays a forward annual dividend yield of 7%.
I am not expecting the company to drastically improve its operating results over the first half of this year, but I believe it will pick up momentum during the second half of this year. AT&T is a buy up to $33.
