AT&T (T) seems like another good defensive stock with a strong buy case right now. I note the Dallas-based telecom giant has fallen 25% since the start of the month, though most stocks have suffered a similar fate. Many are down much more than that. Now, things may well get pretty bad out there. I saw that over three million Americans filed for unemployment last week, which is almost incomprehensible.
On that note, it is likely that AT&T will also take some kind of hit. Its WarnerMedia segment seems the most obvious place for disruption. This was a circa $9,700m EBITDA business last year, broken down into Turner ($5,380m), Home Box Office ($2,435m) and Warner Bros. ($2,540m). TV production over at Warner Bros. has been suspended, while its film releases have been pushed back now that movie theaters are no-go zones.
The suspension of major sports leagues will also hit broadcasters, including Turner Sports, for obvious reasons. Advertising was a $4,500m revenue business for Turner last year, with live sports being a big draw for ad-dollars. That said, certain other Turner division assets – news station CNN and kids’ channel Cartoon Network being two examples – are doing great. Folks, and their kids, being stuck at home is giving a boost to the company’s non-sports linear-TV assets.
Anyway, it appears to me that AT&T’s core business will hold up better than most. To provide some color to that statement let’s take a look at last year’s finances. All-in-all, the company generated around $60,000m in annual EBITDA. Just over $50,000m of that came from its Communications segment, which encompasses everything from selling cell phone contracts – a circa $30,000m EBITDA business last year – to pay-TV, broadband internet and advanced services for corporate customers.
There will no doubt be some volatility here too. I’d imagine we could well see an acceleration in folks cancelling expensive pay-TV subscriptions, for example. The company has already lost around five million video subscribers over the last three years and I expect that to continue. That said, and taken as a whole, I’d wager that these utility-like segments will hold up quite well.
The debt load has been the main focus here for some time now. Of course, entering a period of unprecedented uncertainty with around $150,000m in net debt is not ideal. A quick look at the balance sheet shows around $11,800m maturing in 2020. Before the virus, AT&T expected to generate around $28,000m in free cash flow this year. The cash dividend consumes around $15,000m, so let’s put excess cash generation at around the $13,000m per annum mark in ‘ordinary’ circumstances.
On the face of it, those figures look rather tight, especially as free cash flow will probably take a hit over the next few months. However, this doesn’t strike me as such a big deal for a couple of reasons. Firstly, the company could easily refinance its short-term debt. Interest rates are on the floor and it wouldn’t have a problem raising cash. Secondly, the company has untapped credit facilities, plus around $12,000m in cash on its balance sheet. At circa 2.5x EBITDA, the debt load looks manageable to me.
We are back into ultra-cheap territory here. The virus will wreak short-term havoc, but just look ahead to the company’s 2022 targets. It reckons it can generate around $30,000m in annual free cash flow at the low end, with adjusted earnings per share coming in at around the $4.50 mark.
These targets are not particularly aggressive. Heck, it can realize a lot of that just through debt reduction. The company sees net debt around $20,000m lower by the end of 2022 versus current levels. Quick math suggests at least $1,000m in pre-tax free cash flow would be generated simply via saved interest expense. Share buybacks would do the rest.
AT&T stock closed the week under the $30 mark. It trades at around 8.5x last year’s profit. The $2.08 annualized dividend yields around 7% as things stand. Let’s assume it carries on with its annual penny-per-share raise to the quarterly dividend. This equates to a payout of $2.16 per share on an annualized basis by 2022. Considering this would cost the company just $560m more in cash each year (absent stock buybacks), it strikes me as a pretty conservative scenario.
Here’s the thing: at a 5% dividend yield we would be looking at a share price in excess of $43. In addition, shareholders will realistically collect another $4.20 or so per share by way of cash dividends over the next two years. All-in-all, I fail to see how folks won’t be making 60%-plus returns here over that period. You get to collect a 7% cash dividend in the meantime too. The last time AT&T stock was down here, it rallied 30% in six months. For a mega-cap domestic stock that will weather the storm better than most, this strikes me as a good deal.
If you enjoyed this article and would like to get new posts directly to your inbox, feel free to enter your email address in the sidebar and hit the “subscribe” button. Thank you for reading!