Tag Archives: DISCA

AT&T Stock Has an Attractive Dividend Yield and Can Climb Higher

In the last 12-months, there have been dozens of stocks that have provided multi-fold returns. At the same time, there have been underperformers in the bull market. AT&T (NYSE:T) stock is among the top names in the list of stocks that have remained depressed.

Source: Shutterstock

Even setting aside its company-specific developments, there are several reasons to consider buying T stock. The broad markets are trading at a cyclically adjusted price-earnings-ratio of 37.9, making  the company’s stock look attractive at a forward P/E of 8.6. Its downside risk appears to be minimal, and there is a good chance that it can rebound meaningfully.

Furthermore, T stock has a beta of 0.75, meaning that it’s not volatile. It makes sense to hold some low-beta stocks, given the market’s current valuations. I would not think twice before buying the stock.

AT&T  disappointed many shareholders by announcing that its quarterly dividends would be cut by half after the spinoff of its media assets. However, I believe that this negative is likely to be offset by the value that will be unlocked by the spinoff. At the same time, as the leaner AT&T grows, it will probably raise its dividend  in the long-term.

Let’s look at the specific factors that can serve as positive catalysts for the stock.

The Spinoff of AT&T’s Media Assets

In May 2021, it was reported that AT&T was planning to spin off its media assets and merge them with Discovery (NASDAQ:DISCA). There was speculation that  AT&T’s media business would be valued at over $50 billion in the merger.

It was soon confirmed that the deal would take place, with AT&T’s media business being valued at $43 billion. AT&T’s shareholders will be receiving 71% of the stock of the new company. The deal is likely to be closed by mid-2022.

I believe that the spinoff will create value for the owners of T stock in the medium-to- long-term. In the wake of the deal, AT&T is likely to be a leaner organization that is completely focused on its wireless and fiber units.

It’s also worth noting that HBO Max and HBO reported a total of 67.5 million subscribers as of the end of last quarter. HBO Max expects to have 70 million-73 million subscribers at the end of the year.

Given the streaming assets’ sustained subscriber growth and the impending merger of AT&T’s Warner Media with Discovery,  new Discovery’s outlook seems positive. Indeed, Discovery CEO David Zaslav is targeting 400 million streaming subscribers across the world for the combined entity.

As of the end of Q2, Netflix (NASDAQ:NFLX) reported 209.18 million global subscribers and a market capitalization of $229 billion. AT&T has a current market capitalization of just under $200 billion. Clearly, there is room for value creation if post-spinoff Discovery reaches its target of 400 million global users.

The Healthy Growth of AT&T’s Communications Units

AT&T’s postpaid mobile subscriber base grew at a healthy rate in Q2. For the quarter, the company reported a net addition of 789,000 subscribers. The company’s fiber subscriber base increased by 246,000, reaching 5.4 million.

Several factors boosted AT&T’s subscriber totals. First and foremost, the company is benefiting from strong demand for 5G services. Furthermore, with more people working from home, the demand for faster services has risen.

With these trends likely to continue over the long-term, AT&T is well-positioned to benefit from them in the coming years. It’s worth noting that the conglomerate’s mobility segment reported Q2 EBITDA of $8.0 billion and an EBITDA margin of 42.4%. The segment is the conglomerate’s main cash flow engine.

As AT&T’s communications business continues to grow, the firm is likely to have ample funds to both make investments and pay a high dividend.

The Bottom Line on T Stock

AT&T is likely to become a leaner organization in the next 12-24 months. This change will help it sustain its positive momentum in the telecommunications sector.

T stock has remained depressed, but it seems that the worst is behind it. Its business continues to generate healthy cash flows, and it has plenty of funds to invest in 5G infrastructure. At the same time, the new Discovery will be well-positioned to benefit from its global growth.

Considering these factors, it’s a good time to accumulate T stock. Once the spinoff is completed, the shares will be well-positioned to rally.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

AT&T’s Upcoming Discovery Deal Is Its Only Appeal

AT&T (NYSE:T) stock has been a major disappointment for shareholders. T stock is down not just year-to-date, but also over the past 12 months. Additionally, it has lost roughly 25% of its value compared to where it traded prior to Covid-19. All this occurred in the midst of the huge market-wide bull run.

Image of AT&T (T stock) logo on a gray storefront.Image of AT&T (T stock) logo on a gray storefront.

Source: Jonathan Weiss/Shutterstock

AT&T’s problems stem from a long-running issue: its lack of growth. AT&T’s core telephone business is a cash cow, but it has limited growth prospects. To overcome that, management engaged in an increasingly ambitious set of acquisitions to try to jumpstart the enterprise.

But some of these planned buys, such as DirecTV and WarnerMedia, failed to meet expectations. In the end, AT&T ended up with a massive debt load and insufficient cash flow to meet its large dividend and interest burden.

A Dividend Cut and Strategic Repositioning

To address AT&T’s structural problems, management has shifted its focus. Now, it is pruning off the non-core businesses. It is divesting its media business by merging it with Discovery (NASDAQ:DISCA) and then spinning that firm off.

The company believes the combined assets might have enough critical mass to compete with Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS). In any case, it should do better under dedicated management than it does being run by AT&T’s executives.

Meanwhile, AT&T is unloading other things as well. The DirecTV business was recently spun off to a private equity owner, for example. In making these moves, AT&T can reduce its debt and refocus the firm on its more successful core telecom operations.

Alas, one thing didn’t survive the reshuffling. AT&T’s dividend yield, which was up more than 7%, will face a nearly 50% cut once these asset divestments are complete. With a much smaller business and revenue base to work with, it makes sense that AT&T will have to scale back its dividend as well.

Don’t Worry About the Discovery Deal Pessimists

The biggest moving piece for AT&T right now is its upcoming deal with Discovery. There has been some speculation that AT&T will change the terms of the deal. This, in turn, could be a negative for T stock. Why is this being discussed?

Many investors are under the impression that DISCA stock is cheap right now. It did crash from $78 this spring to its current price around $28. That’s a huge pullback.

However, keep in mind that Discovery only ran up because Bill Hwang’s Archegos Capital ran shares up. Hwang bought stocks like Discovery on massive leverage.

When Hwang ran out of margin borrowing capacity, however, his stocks collapsed. One former Archegos pick, Gaotu Techedu (NYSE:GOTU), fell even harder than DISCA stock — it has lost more than 90% of its value since the short squeeze ended.

Many Hwang stocks have settled back around where they traded prior to the pandemic. So it goes for Discovery. DISCA stock traded between $20 and $30 for most of the past five years. Thus, a $28 stock price now is hardly surprising — it has simply settled in its traditional trading ground.

All this to say there’s no need for AT&T to recast the Discovery deal. DISCA shareholders are complaining about the stock’s low price now, and that makes sense if they’re still anchored on its artificial valuation from the short squeeze. But at the end of the day, there’s no reason for AT&T to change the game plan for its media merger.

T Stock Is Not a Buy Outside the Discovery Deal

The upcoming deal with Discovery is by far the most interesting piece of the AT&T story. It’s understandable that some investors might want to hold on to T stock until the spin-off is complete. Shares of the new media entity might pop once it is a free-trading stock on its own.

But if that’s not their thesis, investors should steer clear of T stock. It got into this mess due to management’s poor capital allocation decisions. Simply put, AT&T likes to make big acquisitions, and these have failed with an alarming consistency.

Once the Discovery deal is done, AT&T will need to get back to basics. It needs to prove it can still operate its telecom business well while paying down debt and getting the company back on firmer footing.

This process will take a while to play out, however. And the slashed dividend will keep income investors from returning to T stock for quite while. Verizon (NYSE:VZ) stock is a much cleaner and simpler way to own stable blue chip U.S. telecom shares.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.