It’s been a while since I’ve written about AT&T (T), with a reader message prompting me to post a brief update today. Put simply, my view on the struggling Dallas-based telecom giant to date has been that it is just too darn cheap, warts and all. Those warts now include the unwinding of its big ticket acquisitions, DirecTV and WarnerMedia, plus another biggie – the dividend cut. If Seeking Alpha and Twitter are anything to go by, it’s the latter in particular that represented the last straw for the previously loyal.
Suffice to say that the stock has been a poor performer since it last featured here back in mid-2020. It has fallen over 15% in that time, with dividend cash not enough to bring total returns into the black. That’s obviously pretty frustrating all things considered, and even more so given many “value” stocks have been catching a bid of late. It also compares poorly to peers, with underperformance versus Verizon and T-Mobile running at circa 840bps and 1900bps respectively (with dividends) over the period mentioned.
Bad news clearly isn’t in short supply here, then. The company’s core business has its issues amid fierce competition, while WarnerMedia is likewise feeling the heat from the streaming wars. Also, it’s not like it was ever a beauty queen to begin with; growth is tough to come by and its business needs a ton of retained cash just to keep things ticking over. Still, I’m sticking with the view that the shares are cheap, notwithstanding the issues, though at this point I feel like one of the last soldiers left in the jungle.
Not Much To Cheer In Recent Results
Results for the final quarter of last year were a mixed bag. On a company-wide basis, revenue increased 4.2% to $41b after stripping out the impact of the offloaded Video business, but EBITDA fell 8% year-over-year to $11.3b.
Mobility, the lion’s share of the business, actually looks like it put in some solid numbers. Segmental revenue was up 5.1% year-on-year there in Q4 to $21.1b, with wireless service revenues up 4.6% to $14.7b. The firm added around 885k net postpaid phone subscribers in the quarter, which was higher than the year-ago period, and that took total 2021 postpaid phone net adds to 3.2m. Average revenue per user (“ARPU”) was soft, however, falling 0.75% to $54.06. Mobility EBITDA increased by just over 3% for the year as a whole.
The situation looks a bit rougher elsewhere. Consumer Wireline revenues rose 1.4% to $3.2b in Q4, with broadband revenues up 5.4% to $2.3b. That was driven by fiber adds of 271k, which was down slightly on the year-ago period and lower than the 289k recorded in Q3. Fiber adds (which generate more revenue) drove broadband ARPU to $55.96, up from $53.72 in the year-ago period, even though total consumer broadband net adds dipped by 20k. Quarterly EBITDA was also down, falling over 2% to around $1b on higher costs, while full-year EBITDA fell mid-single-digits. Business Wireline also posted profit declines, with EBITDA falling 4.3% to $2.2b in Q4. Revenue there fell over 5% year-on-year.
WarnerMedia Also Struggling As We Get Clarity On Its Future
WarnerMedia also looks like it is closing out on some soft notes as we got clarity on its life post-AT&T. The company confirmed that it will be spun-off, with current AT&T shareholders receiving 0.24 shares of the new Warner Bros. Discovery for every AT&T share they own. AT&T shareholders will own just over 70% the new company, which will house assets ranging from Eurosport to Cartoon Network and is slated to post around $50b in annual revenue and $14b in annual EBITDA from next year.
Anyway, back to WarnerMedia. Revenue at the segment increased 15.4% year-on-year and around 17% sequentially last quarter to $9.9b. Direct-to-subscriber revenue increased 11.5% year-on-year to $1.9b, with global HBO Max and HBO subscribers up over 13m to 73.8m. Domestic subscribers increased 5.3m to 46.8m, but domestic subscriber ARPU fell 5.7% sequentially to $11.15. EBITDA fell significantly, to $1.7b versus $2.7b a year ago, on the back of much higher content and marketing costs.
Shares Still Look Cheap But With Plenty Of Uncertainty Attached
AT&T stock currently trades in the $24.70 area, equal to around 8x the low-end of 2022 adjusted EPS guidance. That guidance also sees free cash flow in the $23b range, with net capital spending increasing to circa $20b as the company invests in 5G and FTTH broadband. Note that those figures do include WarnerMedia, with free cash flow also including payments from DirecTV.
We also got clarity on the rebased dividend, which will come in at $1.11 per share annualized (versus $2.08 per share currently), and quick math puts that at the low-end of the previously announced $8-9b aggregate guidance. The dividend yield is 4.5% as things stand. (You can subtract Warner Bros. Discovery equity and arrive at a higher yield; it depends which you see as more accurate).
With that, my view is that the stock remains undervalued. The current share price works fine with zero cash flow growth from here on out, and I have erred on the side of caution a bit with respect to baseline free cash flow. I do, however, think that the market’s reluctance to bake anything in on the growth front is understandable, given the uncertainty. For one, competition with the cable companies and the other wireless providers makes for a brutal operating environment in the remaining core business. The economics of content streaming is also weighing heavily on players there, including WarnerMedia.
Still, there is a good deal of upside to be had, even on very modest mid-to-long term cashflow growth. Somewhere in the 1-2% per annum area (falling to zero thereafter) points to a fair value of $30-plus, and that’s a trade I will (still) happily take. For now though, AT&T continues to disappoint an already skeptical market.
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