Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors can't get over the performance of the U.S. telecommunications giant AT&T. The share price has fallen by almost 16% compared to a decade ago, and this is enough for most to declare the stock "dead".
The business was focused exclusively on telecommunications, then became a media conglomerate. It just became a telecommunications company again when it spun off its media assets into Warner Bros. Discovery. None of this seems to make sense to the market.
So what does it take to get AT&T stock moving in the right direction? We seem to know the answer; today we'll tell you about it and define why AT&T can still be a reliable long-term investment.
AT&T's massive debt load has been the most resilient aspect of the company over the past decade and may explain the market's poor treatment of the stock. AT&T's net debt is $168 billion (total debt minus cash on hand), which exceeds the company's entire market cap!
The company has spent billions of dollars on two massive acquisitions, including $67 billion for satellite TV company DirecTV in 2015 and another $85 billion for media company Time Warner in 2018. In 2021, AT&T walked away from its media assets, selling part of DirecTV for $16.25 billion last year and, more recently, spinning off Time Warner in a merger with Discovery earlier this year that transferred some of AT&T's debt to the new company.
No doubt, AT&T still holds much of the debt from these deals on its balance sheet, with little to no profit from these resources going forward. The company's net debt has grown by 170% over the past decade, and its repayment now falls on the shoulders of AT&T's telecommunications business. It's hard to blame the market for punishing the company's stock; it's been a painful decade for AT&T shareholders, and in hindsight, they've wasted a lot of money.
Paying down debt seems like an apparent answer for a company with a debt problem, but is AT&T ready to handle the challenge? The company's management seems to realize how vital it is to improve its balance sheet. Most investors will tell you that AT&T's dividend is the main reason they own the company's stock. Although the stock price has fallen 15.8% over the past decade, the total stock return (including reinvested dividends) has been 74% over the decade. So cutting the dividend as part of Time Warner's spin-off was probably not an easy decision.
In the long run, however, it may be the right decision. Management cut the dividend from an annual amount of $2.08 per share to $1.11. Management estimates that the annual free cash flow will be about $20 billion, and the dividend will be about 40% of that amount.
In other words, the dividend would cost the company about $8 billion, leaving $12 billion to pay down debt. Paying off $168 billion of net debt won't happen overnight at an annual $12 billion, but it's a way forward that gives investors something to watch out for in the coming quarters and years.
So, what's the thesis for investing in AT&T today? Buying the stock has two major advantages due to the market's reluctance to take it.
First, AT&T remains an excellent dividend asset, even after management has drastically cut payouts. AT&T still has a dividend yield of 5.3% at the current stock price, outperforming bank accounts, government bonds, and most other dividend stocks on Wall Street. So while your dividend yield has declined, holding the stock is still profitable.
Second, AT&T has become extremely undervalued. Despite its problems, the stock has traded at a median price-to-earnings (P/E) ratio of 16 over the past decade. For now, the forward P/E ratio is only 8, which is half the long-term "norm."
Don't mistake AT&T for a fast-growth company. Analysts expect earnings per share (EPS) growth to average 3% to 4% per year over the next three to five years.
If investors warm to AT&T as it reduces its debt load, the company will have plenty of opportunity for a return on investment from a valuation that will gradually begin to return to what it was trading at in the past. AT&T may not be the most interesting stock in your portfolio, but it could perform well over time.
As long as the price is above the 20.35 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 21.24
- Take Profit 1: 22.00
- Take Profit 2: 23.40
If the level of 20.35 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 20.35
- Take Profit 1: 19.50
- Take Profit 2: 18.50