by Anonymous

Introduction:

Good morning/evening everyone. AT&T won over ABBV and PG in the latest poll (on r/dividends). There is a lot to unpack with this stock and it is definitely more controversial, especially in regards to it’s debt. Let’s take a look at everything it does, the financials, and a quick look at its investments/acquisitions. The dividend and possible growth with also be discussed.

AT&T – American Telephone and Telegraph:

Sector: Communication Services

AT&T is a diversified global leader in telecommunications, media and entertainment, and technology. It operates four segments:

• AT&T Communications:

AT&T Communications serves +100 million with TV, mobile and broadband services. In addition, it provides internet to more than 3 million business customers.

• AT&T International:

AT&T International provides TV and wireless services to consumers and businesses in over 11 countries in Latin America and the Caribbean.

• AT&T ad and analytics:

Ad and analytics provides marketers with targeted, data-driven advertising focused around premium video content.

• Warner Media’s HBO & Turner and Warner Bros divisions:

Warner Media’s HBO, Turner and Warner Bros. are leaders in creating content and operating the world’s largest TV and film studio.

Strengths:

– Acquisitions have added to AT&T’s economic moat, increased revenues, increased ability to bundle services (synergies that enable cost cutting).

– Billions of dollars in capital expenditures and company investments (over 170 billion the last 5 years).

– The company merger with Time Warner will allow it to squeeze its way into the lucrative streaming market. Having one of the world’s largest content creators combined with AT&T’s services could be powerful. (This will be discussed further below)

Risks:

– Lots of debt. This company is quite leveraged. The Time-Warner merger increases AT&T’s debt to the point the company balance sheet should be watched intensely.

– AT&T is largely concentrated in the US right now.

– Intense competition from Verizon and other telecom giants.

Financial History:

Before diving into the financials AT&Ts goals need to be discussed. Recently they appointed a new president for the company, their stated goals include bringing down their overall debt, increasing their earnings and cash flow through the HBO and Warner acquisitions, remaining committed to the dividend, and the sale of underperforming assets to streamline capital investments.

This first chart will break down their Revenue, Earnings, Debt, and Debt Ratio over the decade. The source of the information is the company 10K SEC filings.

Year	Revenue	EBITDA	Short + Long Term Debt	Debt / EBITDA
2011	$126,723	$32,443	$65,573	2
2013	$128,752	$47,005	$75,293	1.5
2015	$146,801	$45,551	$129,613	2.8
2017	$160,546	$45,572	$165,665	3.6
2019	$181,190	$56,172	$191,680	2.9

Revenue as increased 5% YoY, it is pretty solid, for a company this large that has been around for as long as it has double digit growth is definitely not expected. Earnings has increased ~9% YoY over the decade, outpacing the revenue, this is nice since it is increasing their margins.

Debt has definitely grown at a significant pace, this is largely based off their acquisitions over the recent years. Back in 2015 they acquired Direct TV (gross), and in 2018 Time Warner + HBO. In both 2015 and 2017 you can see the spike in the debt to EBITDA levels above the 3x we would normally like to see, however AT&T has stated they are committed to reducing their debt levels, their stated objective is to bring debt/EDITDA below 2.5x. Already we can see at the end of 2019 that they have managed to bring the ratio down to 2.9, which is a good trend, something that, based on their quarterly earnings this year, they have been continuing.

Let’s take a closer look at the cash flow, and their debt payments.

Year	Cash Flow from Operations	Capital Expenditures	FCF/E Ratio	Debt Payment / Influx
2011	$34,743	$20,272	$14,833	+362 Million
2013	$34,796	$21,228	$22,706	+9,138 Billion
2015	$35,880	$20,015	$39,792	+23,927 Billion
2017	$38,010	$21,550	$52,342	+35,882 Billion
2018	$43,602	$21,251	$11,023	-11,328 Billion
2019	$48,660	$19,635	$15,430	-13,603 Billion

Net cash flow is very strong and growing ~4% average. Their CAPEX line has been steady, but note that it does not include the cost of any mergers, acquisitions or purchases.

Now, the Free Cash Flow to Equity is looking really weird in 2015 and 2017, the reason there is such a spike in FCF/E is because those are the years AT&T loaded up on new debt, note the spike in Long Term Debt in the previous chart, the influx of cash from those loans is simply being added to the FCF/E here. If they are subtracted the ratio more in line with the $15 Billion they have averaged.

Lastly, the debt payments. After the acquisitions, we can see that in 2018 and 2019 they have been making substantial debt payments. Based on the recent quarterly earning they have continued to pay down the debt load.

So, thus far we have seen increasing revenues and earnings, strong free cash flow, and an increase in debt repayments. Good trends, yes the company is still leveraged, but not as leveraged as some other companies we have recently looked at (Looking at you IBM – they are currently approx 4x debt/EBITDA)

Anyways, let’s now take a look at the acquisitions before discussing the dividend.

Direct TV:

AT&T acquired DirectTV in 2015 for ~$67 Billion dollars. Since then (and even before the acquisition), It has YoY decreasing profits as more and more people move away from traditional expensive cable in favor of streaming. Already they are looking to action off Direct TV, with optimistic guesses it’ll likely sell for around $20B Billion. There is no doubt that this was an absolute failure and questionable decision, even in 2015, given the trends. This is one of the largest factors causing the former CEO Stephenson to be replaced.

Selling Direct TV would allow AT&T to continue off-loading legacy, and capital intensive segments to boost free cash flow to focus on growth of more profitable (and not declining) company segments. It does come with a stinging loss of over $40 Billion just from the sale alone. The new CEO, Stankey, seems more than ready to just offload Direct TV, use the cash to invest back into the company, and move on.

Time Warner (Warner Media) and HBO:

These acquisitions were incredibly expensive for AT&T, however, unlike Direct TV, they are becoming significantly more profitable. The profits for Warner Media in Dec 2019 was ~9.5Billion, these numbers are down for 2020, however much of the loss is attributed to the impacts COVID has had to the entertainment industry. Now, the introduction of HBO Max streaming was botched and delayed, this gave significant ground to Disney and Apple as they released their streaming services, however, HBO Max is reported to have ~38 Million subscribers at this point in time, which is ahead of their previous timeframe predictions. Their stated goals are to have over 50 Million domestic subscribers by 2025, and increase the subscription revenue to over $5 Billion by that time.

In addition to this, Warner is planning to aggressively push its streaming service in 2021 by releasing every single one of its movies on HBO Max. This move is definitely putting AT&T on the offensive and many are awaiting to see the response from Netflix and Disney will be. Warner does still have agreements with AMC, however over the decade theaters as a whole have been on the decline. This just highlights how significant the move into streaming by Disney and AT&T have been. Yes AT&T was late to the party, but they have their slice of the pie and Warner Media produces tons of movies and entertainment, it will likely continue to have a significant impact to the company’s profitability as streaming becomes more and more favorable over theaters and traditional cable.

There is a lot more to the Time Warner and HBO piece that will not be touched on here, please do your own research to supplement these points.

Let’s Take a Look at the Dividend and Price/Value, and Growth:

The AT&T is a dividend Aristocrat, its dividend has been paid continuously since 1881 and increased for 36 consecutive years.

NOTE: Current for December 2020 and very likely to change.

Stock Price	$29.54
P/E Ratio	19.44
Current Annual Payout / Share	$2.08
Yield	7.04% (Based on Price Dec 2020)
10 Yr Div Growth Rate	2%
3 Yr Div Growth Rate	2%
1 Yr Div Growth Rate	2%
Current Payout Ratio (Based on Earnings)	58.26%

The payout ratio may seem lower here, however, using the Cash flow from the chart above, in 2019 their total cash flow from operations was $48 Billion, minus the CAPEX of ~$20 Billion leaves around $28 Billion in free cash. According to their 2019 10K the amount paid out in dividend distributions was ~$14.8 Billion. So just about half of the free cash, leaving the rest to be paid towards short/long term debt, or whatever other financing activities.

However, AT&T under their new leadership has several ways to go about increasing their margins here. Firstly, they could pay down debt to decrease future debt payments, this is one route they have mentioned they are committed to. Another is they could cut their dividend payment. The new CEO and management have stated they are committed to the dividend, however, this is a route that could be taken to further increase the cash flow for the company which could be used for more aggressive debt payments, and reinvestment back into the company to further stimulate growth and increase the profitability of their Media segment.

Note though, AT&T has not been buying back shares at this time, in fact the number of outstanding shares has increased from 5,926 to 7,305. This does dilute the value of the stock, however, over the short term (especially if you are holding more long term), this isn’t necessarily bad. You will see less price appreciation, but because they are paying out a dividend it will allow you to accumulate more shares through DRIP, so later on when the company can afford to buy back shares in addition to payout a dividend distribution you will see the benefits from the compounding effect of accumulating shares, and stock price appreciation. This ofcourse assumes that the company will move itself in a position to afford this. So the question you’d have to ask yourself here is whether or not you believe AT&T can manage their debt, whether their telecommunication services will remain relevant, and whether their Media services can turn more a profit.

Closing Thoughts:

This stock is definitely more controversial but hopefully this post helped highlight some key points. With the new CEO in management it will be interesting to see how AT&Ts current position changes. They have been trending towards completing their stated goals like bringing down debt, and investing into their media services.

If you’re not sure if you like the company, add it to a watch list, watch its movements for awhile, check out the news from the company. Take your time to research, investing is not a race, more a journey. And, as always, please supplement this with your own research.

A quick disclosure, I do own AT&T stock, but that says nothing! Do your own research! There are more risks that need to be considered, read opposing views. Don’t just read whatever will validate a preformed opinion. Thanks for reading, and have a good day/night!

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.