Owning AT&T Inc (T) — a Top Pick for aggressive investors — has been an exercise in patience since the retirement of visionary CEO Ed Whitacre, who combined wireline and wireless franchises of four “Baby Bells” and several regional service providers, suggests Roger Conrad, editor of Conrad's Utility Investor.
Whitacre’s successors spectacularly failed to convert what was then America’s leading communications network company into a multi-media giant — buying the former Time Warner at virtually the same time Rupert Murdoch was fleecing Disney (DIS) with the $70 billion plus sale of another studio.
Current CEO John Stankey and his team have been returning AT&T to its telecom roots. They started with some tough medicine — halving the dividend and completing the disappointing spinoff of Warner Brothers Discovery (WBD), followed by two successive first half reductions in 2022 earnings guidance.
But now investors have reason to be hopeful again. Management raised the mid-point of its 2022 earnings guidance range following strong Q3 earnings. It affirmed its $14 billion free cash flow target for the year, a level that would cover dividends with $4 billion plus to spare. And despite inflation pressures and tough competition, the company expects to do much better in 2023, projecting $17 billion in free cash flow.
5G wireless has so far failed to give US communications companies much of a revenue and earnings bump. That’s because the American consumer has been unwilling to pay meaningfully more for what’s been sold as basically 4G on steroids, at a time when inflation has stretched budgets. And companies have stepped up efforts to lure customers from competitors, squeezing margins further.
I expect 5G to ultimately become a more robust driver of growth for AT&T and its primary rivals T-Mobile US (TMUS) and Verizon Communications (VZ). The company already has over 100 million Internet of Things connections, including one million automobiles. And its 5G and converged fiber broadband offerings continue to meet with success.
AT&T also posted faster wireless and fiber broadband customer growth in Q3 than from the first half of the year, indicating its marketing efforts are finding some success. And successful cost cutting and debt reduction are boosting margins as well.
Even after the Warner spinoff, AT&T’s debt burden is still around $153 billion, making further reduction a priority. About 8.5 percent of its obligations are at variable rate, meaning the cost rises with interest rates. And there’s $14.58 billion in maturing debt through the end of 2024 as well as $21 billion in projected 2023 CAPEX to finance.
The company’s ability to self-fund its CAPEX and dividends with cash to spare for debt reduction, however, means risk is actually a good deal less than it appears. And by paying off maturing debt through 2024, the company will extinguish nearly half its variable rate obligations.
My expectation is AT&T will surprise investors with a low to mid-single digit percentage dividend increase next year. But even the current yield of nearly 6 percent is attractive. And at just 7.7 times expected next 12 months earnings, investor expectations are quite low and therefore easy to beat.
I’m also encouraged by the recent wave of insider buying, which stands in contrast to the split decision in the analyst community. Bloomberg Intelligence reports 16 buys, 16 holds and 2 sells among research houses it tracks.
With risk of a recession and further stock market downside looming large, it may be some months before AT&T shares show meaningful gains. But I’m comfortable rating the stock a buy for very patient value seekers at a price of $20 or lower.
