New Growth Catalysts to the AT&T Story

06/05/2019 5:00 am EST

Focus: TELECOM

Ben Reynolds

CEO, Sure Dividends

AT&T (T) is one of the largest telecommunications companies in the United States when measured by market capitalization ($221 billion), notes growth and income specialist Ben Reynolds, editor of Sure Retirement.

In late April, AT&T reported (4/24/19) financial results for the 2019 first quarter. Revenue of $44.8 billion missed analyst estimates by $270 million, while adjusted earnings-per-share of $0.86 matched analyst expectations.

Revenue increased 18% for the first quarter, primarily driven by the Time Warner acquisition that closed in June 2018. Adjusted earnings-per-share of $0.86 rose 1.2% from the same quarter a year ago. Revenue growth was heavily offset by rising expenses and a higher share count. AT&T’s core mobility segment grew revenue by 2.9% for the quarter, thanks to 179,000 net postpaid smartphone customer additions during the quarter.

AT&T’s biggest growth catalyst is its recent $85 billion acquisition of Time Warner Inc., a content giant that owns multiple media brands, including TNT, TBS, CNN, and HBO.

Time Warner also owns a movie studio as well as sports rights across the NFL, NBA, MLB, and NCAA. AT&T has made additional bolt-on acquisitions to boost its growing content businesses as well and is working to maximize the advertising capacity of its content. We are conservatively anticipating annualized earnings-per-share growth of ~3% per year for the foreseeable future.

AT&T scores extraordinarily well in terms of dividend safety, particularly relative to the company’s exceptionally high yield. To start, the company has increased its dividend for 35 consecutive years, which qualifies it to be a member of the Dividend Aristocrats Index.

Separately, AT&T is on pace for a dividend payout ratio of just 57% in the ongoing fiscal year. And importantly, AT&T paid off over $2 billion of debt in the first quarter, ending the period with a net-debt-to-adjusted-EBITDA ratio of 2.8x. AT&T will pursue additional debt reduction in part through asset sales, such as the recent deals to sell its stake in Hulu, as well as the $2.2 billion sale of its Hudson Yards space.

AT&T expects to end 2019 with a leverage ratio of 2.5x. While some investors have expressed concerns with debt, the company reported a more-than-adequate interest coverage ratio of 3.3x in fiscal 2018. Management  expects the company to generate adjusted earnings-per-share of about $3.60 in fiscal 2019.

Using this earnings estimate, the company is trading at a price-to-earnings ratio of just 8.4. The stock traded at an average price-to-earnings ratio of 13.4 over the last decade; we have set a fair price-to-earnings ratio of 12 for AT&T.

If AT&T’s price-to-earnings ratio can expand to our fair value estimate over the next 5 years, this will boost its total returns by around 7.4% per year during this time period.

Overall, we believe that AT&T is capable of delivering annualized returns of 16.9% per year from its current price thanks to its high yield (6.4%), earnings growth (3.1%), and compelling potential for valuation expansion (7.4%).

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