AT&T: A Defensive Stock With Upside
Summary
- Most defensive equities have had money poured into them over the last 2 years, bringing yields down with them.
- There are always a few stocks that miss out on the party.
- AT&T offers a fantastic alternative, defensive stock, with a better yield, and better total return prospects.
As coronavirus fears continue to shut down travel, supply chains, and increase fear in the markets, we need to be careful with how we apply any dry powder. There also is the fact that OPEC is now fine with going into a pricing war with Russia due to them not joining the recent output cuts. Both of these combined could make for a true recession over the coming year or two. While the initial drop-off has been steep, I see it as somewhat justified, as a lot of stocks were flying at all-time highs.
I actually think there are a lot of great buys in the market at these prices, but since the downturn could be long, it's important to slowly use excess cash. I plan on buying what I see as the safest stocks that will come back just as strong or stronger after this correction/recession first. Then, moving down the ladder to stocks that could offer even better total returns but are a little too risky now until we see how everything plays out for a few months/quarters.
A lot of traditional consumer staple stocks and utilities have already been flying high the past couple of years as their yields and prices followed that of bond yields and prices. Fortunately, I still see a lot of quality companies that will make it through whatever coronavirus and OPEC can throw at the markets over the next couple of years while continuing to pay a dividend. This article is to go over one such company that offers a much higher, very safe yield, and more room for price appreciation in the coming years than say utilities.
AT&T is a Better Yielding Alternative, with More Upside
One reason AT&T (NYSE:T) has such an attractive yield (currently 5.6%) is that they are in very competitive, capital intensive industries. As if it wasn't already expensive enough to build out nationwide networks every 5 or so years as consumers consistently demanded faster speeds, AT&T decided to go buy Time Warner a couple of years ago to set up for entering the direct to consumer streaming market later this year. And as most everyone knows at this point, it's not just Netflix (NFLX) they're competing against in the streaming market anymore. It's other heavyweights such as Amazon (AMZN) and Disney (DIS).
Luckily AT&T picked up plenty of premium content with their purchase of Time Warner. The list of content includes HBO, TBS, TNT, CNN, Cartoon Network, and all the movies from Turner Classic Movies and the Warner Bros. While Netflix and Amazon have to license content and create plenty of new content, AT&T steps in as an immediate player, much like Disney did last year.
While AT&T had a great 2019, rising from under $30 to briefly over $39, they had struggled mightily the previous 2 years. Here is their stock price over the last 3 years:
Data by YCharts
To me, the biggest reason the stock price struggled was due to the debt load that AT&T took on to buy Time Warner. Once AT&T proved they could churn out cash and start paying down debt, the market rewarded them with a nice 2019. Here's their debt load over that same time frame:
Data by YCharts
Quite frankly, I'm scared to get into most stocks with heavy debt loads at uncertain times such as these. But as AT&T has shown over the last year and a half, they can pay down debt very quickly and get it to more manageable levels. Here are their free cash flows that allow them so many options in paying down debt, paying dividends, and investing in new ventures:
Data by YCharts
So, while I can see why the market has given a wait-and-see approach to AT&T and their purchase of Time Warner if they manage to hit the ground running with HBO Max and continue to churn out cash from their other businesses, I expect for multiple expansion and for their yield to drive down lower.
Most people will continue paying for their phone plans through any market conditions, making a large amount of AT&T's revenues/profits anti-cyclical. 2019 marked the start of the turnaround for AT&T, but they have plenty of room to run higher as I expect them to survive through tough times with their wireless business profits and strive during boom times with their soon to come streaming options.
Conclusion
I personally am going to slowly apply funds to stocks that I see as very safe through any market conditions first. I still am focusing on total returns though, which is why I'm staying away from stocks such as utilities. If bond yields push back higher in the next few years, I could easily see utilities and other traditional defensive sector yields going higher with them and thus prices going down. AT&T offers a very high, safe dividend that will keep on paying you through any price volatility while offering plenty of upside for the long term.
This article was written by
Analyst’s Disclosure: I am/we are long T, AMZN. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (62)
Yeah, they've been one of my worst picks of the last year. Gone nowhere after that initial drop. They still churn out cash. Perhaps they can turn it around if they ever stop buying huge companies.
Are their sales taking a hit? As a company they've increased revenue every year for the last 10 years, except 1 (2017). Their Gross Profit and Operating Income have been in a trend up that whole time too.I do agree they are in some very competitive spaces, like my article mentioned. Guess we'll have to see how it plays out. Lot of worse places to park your money imo.
Indeed a little early. Since I never know where the bottom is, I prefer to buy stocks on the way down, at the bottom, and the way up. I know I'd never be able to pick the bottom exactly, so being slow and methodical with it works best for me.I'm starting with what I consider safe picks like T and WFC, then will move to riskier ones after we have some sort of idea how this is going to affect economies in the medium term.
I hear you with the itchy fingers. It's been tough to stick to that slow and methodical plan I was talking about. And I definitely like major oil and tobacco as well. What companies you talking about in materials?
Seems fair. I was buying around $30 and selling around $35 last year. I wasn't as bullish then, but since they came through on FCF and paying down debt, I have become more bullish.
Thanks for the comments and you bring up some good points. I could definitely see T dropping under $30 in a true prolonged recession, but I could also see it bouncing back up from here and climbing above $40 if this is just a market correction. Also not all stocks bounce back up to former highs after a recession. I don't see this being a problem for T. So I collect the dividend and hold through the volatility.
I don't really think lower pump prices will drop their costs much at all. Seems like a drop in the bucket compared to materials and labor. I agree with @Cleverton that entertainment and ad revenues will be hurt by a much more significant degree if poor market conditions persist through the rest of this year.However, I am still bullish T due to the fact that they will keep paying their dividend through whatever is thrown at us and should continue to thrive on a market rebound (whether in 2 months or 2 years), whereas I see a lot of other defensive stocks struggling mightily when rates start raising again.
In general I try not to time the market too much for things like coronavirus. It will make 2020 tough obviously, but Disney should thrive long-term. Outside of corona affecting their parks, with spending up for Disney+ and revenues down for blockbuster movies since 2019 was such a great year to have to compare with. That being said, I can see Disney knocking it out of the park in the future, and I may buy back into them (owned them for a couple years, but sold at a nice profit after I thought streaming expectations had gotten ahead of themselves). I really like them as a company long-term, but there are a lot of great bargains in the market currently in my opinion.
Yeah I like a lot of the Elliott Management ideas, especially the shifting the capital stack. Some of them are a little bit gimmicky like monetizing the receivables, when they have just as much in accounts payable. But in general I do think they unlock/showcase value. We'll see how practical all their ideas are and how many management agrees/goes through with.
All very thoughtful observations. As to my thoughts on HBO's quality of programming and if it makes the cut in streaming services I'll pay for, I'd say the outlook is still iffy for me personally. While The Wire, GoT, True Detective, and Watchmen are some of my all time favorite shows (Westworld and Barry were pretty good too), the problem for me is that their movie options are just the worst. As it is now, HBO is the most likely service for me to drop. I've considered it many times, since there's not much to watch on there in between the great shows that only take me a few days/weeks to get through. I could probably just have HBO 1 month a year as it is now and binge all their best shows, then cancel. I consider them above Amazon Prime content, but since you get other benefits with Prime, it still makes HBO the first cut.I'm hopeful that adding a few more have-on-in-the-background, rewatchable sitcom-type shows and all the movies with Turner into one whole package brings HBO up onto the same tier as Netflix and Hulu/Disney. The other question will be how many different services are people willing to pay for. I think they'll be in that top 3/4 range, which may be where most people draw the line. If they really knock it out of the park, they may be 2nd choice behind Netflix. Don't think many people are going to pay for NBC's Peacock, CBS All Access, or the other random ones.
A great question as I should probably be asking myself this with every investment anyway, but I have neglected to many times. I guess if they were to bleed legacy DirectTV customers at a faster rate in which they are losing EBITDA faster than the interest on their debt they're paying off is coming down. Also if they have a much, much worse start a year into streaming than analysts anticipate. So all that basically means if FCF came down under $20B annually in the next couple years, I'd be a little worried.
Debt is always relative. FCF of ~$30B last year, so it's the same as a much smaller company that has ~16B of debt and ~$3B of FCF. Both very manageable. I am curious how much of that they'll have to spend on readying/pushing out their streaming options and how much they'll have to keep paying off debt.
In which ways are they dwindling? As I showed FCF has been rising year after year. EBITDA was down in 2019 slightly from 2018, but is expected to rise above both in 2020.
Very true. I expect companies in real financial trouble will have trouble rolling over debt in the next year or two. Those with lots of debt, but underlying business isn't hurt by the downturn, like T, should be able to lower their cost of capital.
