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AT&T: A Defensive Stock With Upside

Mar. 09, 2020 5:08 PM ETAT&T Inc. (T)62 Comments
Matthew Zeets profile picture
Matthew Zeets


  • 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

This article was written by

Matthew Zeets profile picture
I was taught the value of investing and the power of compounding money at a young age by my dad and aunt. My dad helped me start a CD when I was about 10 to get better returns off my Christmas and birthday money. I started investing in the stock market when I was in grad school for Computer Science in 2008/2009. Stocks had dropped so far, it seemed like too good of a buying opportunity to me to pass up. I hardly knew anything about individual stocks, but luckily my timing was good and I saw multi-bagger returns on almost all my stock picks over the next few years. I've been interested in the stock market ever since and have done research on Seeking Alpha the last 5 years, as well as taking a couple online business/finance courses.A farting horse will never tire; a farting man is a man to hire.

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)

Veritas1010 profile picture
Well, fast forward a year.

So as the Misses like to say to me: “How is that workin’ for Ya’?”

Your utility and sector rotation seems fine. Kudos there. But as always, there is the perennial underachiever, AT&T.
Matthew Zeets profile picture
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.
I would like to buy it at high 20's.
AT&T debt is like a boat anchor for their neck, as their sales are taking a hit....?

AT&T competitors are leading the market, from streaming wars, 5G deployment and cellular telecom....?

Price cuts to all those industries are coming, as revenue loses are mounting across the US economy...?
Matthew Zeets profile picture
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.
@Matthew Zeets well you were a little premature @ $35. got in this morning @ $ 32.5 and i am already down lol will buy more next week what a market!!!
Matthew Zeets profile picture
@Meg's Dad
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.
Yeah, I was leaving comments yesterday stating that I will consider buying in low $30 but it looks like I will have to wait for upper $20 to start accumulating again. So many opportunities in this market... Major oil, tobacco, materials and solid dividend aristocrats like T. Just need to be patient with my itchy fingers.
Matthew Zeets profile picture
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?
On my watchlist. Will consider under 30 but not above.
Yes, T will miss 2 q’s, delay debt pay down, then go below 30/sh. Probably. However, if DC pulls out an infrastructure bill.. watch out
Matthew Zeets profile picture
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.
T made a major decision to transform its business lately. They are no longer a utility company with a safe dividend and stability during down cycles. T will go down with the market much further this time and many do not realize new risks.

The entertainment sector is already suffering due to COVID-19 outbreak. When we go into a recession the entertainment expense is the first to slush for consumers. Xandr potential that is already baked into the current price and it will have to be reevaluated due to the falling prices/demand on advertising.

T share price should be below $30 if we find ourselves in the next recession and I do believe we will be reaching this point very soon. For those who are already invested and consider it as a long-term holding, there is no much reason to sell now and miss out on a very nice dividend.
Matthew Zeets profile picture
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.
lower pump prices = lower fleet cost - resulting in massive savings for these telcos; huge savings on fiber build outs, 5g, etc. Time for at&t to aggressively invest in infrastructure.
@spearmint COVID-19 = much worse performance of their now big entertainment division and lower ad revenues.
Matthew Zeets profile picture
@Harry Renquist
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.
Totally agree. I also believe that T has advantage over Disney for the near future because of the Corona issues. Disney has to deal with travel bans and closing parks in Asia and Europe. T is the one!!!
Matthew Zeets profile picture
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.
MikeMikm profile picture
They have multiple ways to grow EPS...more business, lower interest cost...a key is a shift in their capital stack that I believe a lot of shareholders are missing, that is selling preferred shares, taking the money and retiring the common shares. EPS is divided by the number of common shares outstanding, excluding preferred shares. Some may call this financial Engineering but this is one of the things that I believe the Eliot management group brought to the table. They are also monetizing their receivables, then taking this money and purchasing their common shares back. They are highly focused And have a plan to get EPS to between 4.50 and 4.80 per share by 2022. If so, at a 12 PE could put the stock at approximately $50 per share. All this while earning a 6% dividend until such time they do so. I encourage all T shareholders to read the Elliott/AT&T letter. It is a good plan explained on how they plan to achieve a $60 per share price.
Matthew Zeets profile picture
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.
Veritas1010 profile picture
@Matthew Zeets,

Thank you for your focus on $T.

$T is still my.largest position. Have owned it generationally, in and out a few times and collecting those wonderful dividends across decades. That said, $T has a momentous year ahead of it. How will it initiate its streaming service? Will it’s high offering price “out price“ it compared to Disney, Netflix (and a host of other streaming players big and small)? Will assets like HBO still be able to produce award winning programs from (for example) GoT to Chernobyl? Will FirstNet continue to flourish and grow $T’s synergies with the Federal government and private sector users thus exposed?

Of course I could continue from international results to DirecTV losses, but these aren’t my focus here, these are challenges everyone knows about and are “baked-in” to the price just like the positives that Paul Singer’s nudge as an activist “investor” may have offered initially.

The real question is can $T make a success in the steaming business or not? Or, did it over pay (again) like DirecTV for assets it is incapable to grow competitively.

While streaming and Time Warner only make a reasonable chunk of $T’s disparate business dollars it is critical to this management (even sans Stevenson and possibly Stanley) and more importantly the shareholders (us!!!) that they have a win here for the long term health and growth of $T.

$T has a terrible rep with its customer service as most former telecommunications companies do. This doesn’t give it a lot of play or forgiveness by the market nor its work force it is always looking to unload and shaft.

Meanwhile, the clock is ticking...and I think a lot more investors than I are watching (and collecting), patiently...

disc.: long $T, $VZ.
Matthew Zeets profile picture
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.
bought today 34.50 I agree with many of your ideas. thanks for the article. is there anything that would change your mind about T?
Matthew Zeets profile picture
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 of staggering $164.00 billion! Wow very promising!
Matthew Zeets profile picture
@Deep Purple
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.
@Matthew Zeets
$164 billion is NOT manageable considering AT&T is dwindling!
Matthew Zeets profile picture
@Deep Purple
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.
Plan to buy more T soon.

Retired dividend-growth investor
Long T!!
Love T!
Low (or negative) interest rates will open the door to a refinancing bonanza for T.
Matthew Zeets profile picture
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.
T is nudging a 6% dividend again. Could be time to buy despite the carnage. A terrific payout for us retired folks. Long T and cautiously adding.
Seatonmanagement profile picture
Standing pat-- no need to try and buy into a falling-knife-market.

Why not slowly add to positions?
because some people like to miss the bottom
Seatonmanagement profile picture
"Average-down," eh? I'm typically fully-invested, retired. Fair point, but falling-knife analogy still instructive to me at moment.
D.S. Leach & C.E. Leach profile picture
Bought some more T today at $34.43. Will pick up more if it continues to drift down.

After today's action in the market, it is a minority at still being green for me.. but I think $60 , at this point, is a tad rich! Have to wonder when this prediction was made. I'd be very happy at $45!! Or even just stay above $30..
MikeMikm profile picture
Read the letter, Google Att Elliot letter and read the contents. Very detailed. They spent 10 months with 400 people( employees,advisors, etc) doing their due diligence before investing 3.2 billion.
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