Source: PaxForex Premium Analytics Portal, Fundamental Insight
AT&T was once considered a solid asset for conservative, income-oriented investors. Over the past five years, however, the telecom titan's stock has lost almost half of its market value, as the company has made some debt-fueled acquisitions, including DirecTV and Time Warner.
But over the past year, AT&T has also taken some important steps to reboot its business and reduce its debt load. It spun off DirecTV, sold other non-core assets, and agreed to spin off and merge WarnerMedia with Discovery.
AT&T says that as a scaled-down company, it will pay more attention to expanding its 5G and broadband networks to keep up with Verizon and T-Mobile in the telecom market. The company is also sure that its new media division, Warner Bros. Discovery, will be more successful as a stand-alone company, not tied to an aging telecommunications company.
The market is not yet impressed with AT&T's plans, but the company recently presented clearer information during analyst and investor day on March 11. Let's take a look at the key points to see if the company can finally generate positive earnings over the next 12 months.
Discovery shareholders formally approved the merger with WarnerMedia on the same day that AT&T made its presentation to investors. This paves the way for a full spinoff of Warner Bros. Discovery in April.
After the deal closes, AT&T investors will receive 0.24 shares of Warner Bros. Discovery for every AT&T share they own. AT&T will also cut its annual dividend from $2.08 to $1.11 per share, lowering its projected yield from 9% to 4.8%.
AT&T restated its forecast for this year. On a pro forma basis, excluding sales and spinoffs, the company expects its revenues to grow in the low single digits. Wireless revenues will grow more than 3 percent and broadband revenues will grow at least 6 percent.
The company expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow 2-4%, even though the company faces a $600 million headwind in the first half of the year from the shutdown of old 3G networks and no new government loans (from the second phase of the Connect America Fund). The company expects adjusted earnings per share (EPS), affected by the tax rate increase, to increase by 0% to 2%.
AT&T also released its outlook for 2023. The company expects its revenues to grow again in the low single digits, with wireless services growing in the low single digits and broadband in the mid to high single digits.
The company expects adjusted EBITDA to grow 5-7% due to $1.5 billion in cost conversion savings and adjusted earnings per share to grow about 2-3%. This steady growth rate should make the company more comparable to Verizon, which has easily outperformed AT&T over the past five years by avoiding large-scale pay-TV and media acquisitions.
AT&T also plans to increase capital investment from $20.1 billion in 2021 (notional) to $24 billion in 2022 and 2023. Each year, the company will allocate about $5 billion to expand its 5G networks.
AT&T expects the company's free cash flow to decline from $19.2 billion in 2021 to $16 billion in 2022 as it ramps up investments, but will increase to $20 billion in 2023 when growth stabilizes. The company intends to easily cover its dividend payout in 2023, with a cash dividend payout ratio of 40%.
In terms of leverage, AT&T expects its net debt to adjusted EBITDA ratio to decline from 3.1 in early 2021 to 2.5 by the end of 2023.
Based on AT&T's targets and the current price of $23, the stock is trading at nine times its earnings ratio in 2022. Shares of Verizon, which is expected to post less than 2 percent earnings growth this year, are trading at 10 times the price.
That low valuation should limit AT&T's downside potential, and there's no real reason to sell the stock before the company spins off Warner Bros. Discovery -- which would essentially be paid as a special dividend to existing investors. After such a spin-off, investors will probably view AT&T as a safe haven again, as inflation, rising interest rates, and other macroeconomic factors contribute to the current rotation toward stocks with stable values and high dividends.
Simply put, experts believe AT&T stock will finally stabilize this year and go back up. Until then, investors should just relax and keep reinvesting its big dividends.
As long as the price is above the 22.70 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 22.98
- Take Profit 1: 24.00
- Take Profit 2: 25.50
Alternative scenario:
If the level of 22.70 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 22.70
- Take Profit 1: 22.00
- Take Profit 2: 21.00
