With 2019 now officially over and 2020 just ramping up, it's a good time to start thinking of the future. In particular, it's nice to think of what the future might have in store for some of the most interesting companies on the market. One such firm, in my view, is AT&T (NYSE:T). What started off as an unloved telecommunications and entertainment giant in early 2019 quickly evolved into one of the year's best-performing large cap stocks. Inclusive of dividends, the company generated a return of 45.5% for the year, comfortably outpacing the 28.9% gain posted by the S&P 500. While investors should not expect the same kind of upside from AT&T (or the market for that matter) in 2020, the firm should do well and reward shareholders comfortably. This is, of course, contingent on one major hurdle the company must overcome. If it succeeds there, upside should be particularly impressive.
AT&T is not your typical conglomerate these days. Burdened by a bloated corporate structure and with no clear vision for its assets, the company had come to be seen in recent years as a let-down of sorts. To fix these concerns, the management team at the business embarked on a strategic restructuring. This involved divesting of non-core assets, streamlining what assets have been left on its books, and finding the 'best' way to reward shareholders that management could think of.
Though it took the better part of a year, the company seems to now be on the right track. This past year, the company sold off assets worth around $14 billion, and it is on track to sell another $5 billion to $10 billion worth of assets to reduce leverage from around 2.5 today to around 2.25 by the end of this year. The company also managed to raise its annual distribution from $2.04 to $2.08 (an increase of nearly 2%), and it's likely to continue increasing this payout over time.
With $28 billion in free cash flow forecasted for the 2019 fiscal year, AT&T's bottom line (in this case operating cash flow) for 2020 will be probably that high if not higher. This will allow for further debt reductions, but will also allow the company to opportunistically buy back its shares. In December, management announced plans to buy back around 100 million shares in exchange for $4 billion through the first quarter of its 2020 fiscal year. If all goes according to plan, this will only represent between a half and a third, more or less, of all the shares the company buys back during 2020.
All of these developments should prove accretive to shareholders, but unless management decides to raise its payout more, I don't believe upside this year will be as impressive as in 2019. After all, while the company's yield currently sits at about 5.3% on a going-forward annual basis, and while that's quite nice in the grand scheme of things, it's not so high that it should be called a cash cow. This is especially true when you consider that the company's preferred units, (T PRA), carry a distribution equivalent to 5% and are currently yielding 4.75%. Though you miss out on appreciation potential and distribution increases through them, you get the 'safety' that preferred units have over common.
So long as guidance provided by AT&T is robust for its 2020 fiscal year, the future outlook for the firm should be nice. Having said that, there is still one big test for the company: its launch of HBO Max. In May of 2020, the company is slated to come out with the streaming service. I wrote a prior article where I delved into the details associated with HBO Max. In short, the service will have around 10,000 hours of content on it, including a slew of upcoming original content, and it will start off priced at $14.99 per month.
By the end of 2025, the company hopes to have around 50 million subscribers in the US, with total global count of between 75 million and 90 million. At a starting price of $14.99, this could bring in up to $14.8 billion in revenue to the firm per year. Some of this count will be free subscriptions given out to current customers, but the bottom line is that it should bring in a lot of revenue to the firm over time. That said, there is some uncertainty surrounding the service. While I have no doubt that it will generate attractive returns for shareholders, there are obstacles to keep in mind. For starters, AT&T's entertainment brands lack the same level of brand recognition that Disney+, provided by The Walt Disney Company (DIS) does, and yet it's forecasting similar user growth. It's also at a price point that's more than double what Disney plans to charge. Either Disney is significantly underpricing its own service, or AT&T might be shooting too high (though some mix between the two is possible as well).
This creates uncertainty for shareholders, but if things do go as well for AT&T as management anticipates, it should set things up nicely for the company this year. Continued strong growth among its own operations, primarily through additional 5G expansion, should be enough to keep shares at least where they are (absent a recession), but its HBO Max initiative could be the deciding factor in where shareholders end up. A strong showing on that front, and today's price for the company's stock a year from now might seem low.
Right now, AT&T is still very much an interesting prospect. I am generally not a fan of growth names, and the company has indeed moved from value to growth over the past year, but so long as management performs as they expect to, the outlook for the giant is bright and investors should consider it an excellent long-term prospect.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.