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Proprietary Data Insights Financial Pros’ Top Telecom Stock Searches in the Last Month
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AT&T’s Stock is Calling for a 10/10 |
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AT&T (T) was once the undisputed leader in communication services. But as Stan Lee once said, “With great power comes great responsibility.” Management ventured far outside its comfort zone with DirectTV and other content services it couldn’t profitably manage. Today’s slimmed-down version contains only its core components, which clearly appeals to financial pros as they searched this stock out at a rate nearly 100x, the norm during the last earnings releases. Now, many analysts love to dump on AT&T, saying their cash flows are unsustainable. Most recently, they point to the miss on free-cash-flow during Q1 earnings. Yet, as our analysis highlights, it would take near cataclysmic stupidity to put pressure on the company’s 6.5% dividend yield. AT&T’s Business Most of us know of AT&T. It’s one of the world’s largest telecom companies with both mobile and wired business. While mobile continues to grow at nice pace, the wired business has been the albatross around the company’s neck. A quick look at the financial breakdowns for consumer and business wired services illustrate the continued decline in volume:
Source: AT&T Q1 2023 Investor Presentation The thing is, neither the business nor the consumer wired business contribute much to overall operating income. So in a sense, who cares if they die a slow death? The 5G and fiber networks are where the growth is happening.
Source: AT&T Q1 2023 Investor Presentation Mobile sales continue to grow at a ridiculous pace while margins keep improving. While there are some legacy carryovers affecting earnings and cash flows this past year, those should all disappear in 2023. Financials
Source: Stock Analysis The question on everyone’s mind is whether AT&T can sustain its hefty 6.5% dividend payout. After all, it carries over $150 billion in debt, which costs them about $6 billion each year. The weighted interest rate on the debt is 3.52%, while the average interest rate is 4.94%. Each year, the company has roughly $8-$10 billion in debt to roll. Therefore, it’s unlikely we’ll see interest expenses explode anytime soon. On average, AT&T generates around $10 billion in free cash flow after servicing its debt and CAPEX, which covers the dividend payouts with a few billion to spare. Valuation
Source: Seeking Alpha So, we find it a bit surprising to see AT&T so cheap on a price-to-cash flow basis. Plus, it’s also cheaper than it’s closest peer, Verizon (VZ) both on price-to-cash flow, price-to-sales, and price-to-book. Growth
Source: Seeking Alpha The cheap valuation relative to its peers could be driven by the lower forecasted revenue growth. Historical metrics are somewhat meaningless here as the divestiture from its Latin American DirectTV operations as well as the Warner Brothers Spinoff throws anything beyond a year off entirely. Profitability
Source: Seeking Alpha What we do like here is the impressive gross and EBITDA margins coming from AT&T relative to Verizon and T-Mobile (TMUS). That’s been a sore spot for them that’s been tough to overcome.
Our Opinion 10/10 We largely feel that AT&T provides an excellent risk/reward. Shares are certainly cheap enough, and with the Fed putting a pause on interest rate hikes, the 6.5% dividend yield should attract plenty of investors seeking safety. Mobile communications are largely recession resistant, and the 5G rollout, along with fiber, should continue to provide steady growth. |
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