AT&T: You Don't Want To Miss This Ship If It Gets A Good Captain

Summary

• Consistent cash generation is a trademark characteristic of AT&T, while the company is betting heavily on growth areas like 5G network and content creation.
• Ill-advised acquisitions left their mark on the company’s capital allocation history; now it’s up to the new leadership to finally enter a streamlining phase.
• While most investors focus solely on the sky-high entry yield, all metrics show that the current valuation is too hard to ignore.

Written by the FALCON Team

Introduction

Just recently, we published our newly established monthly heat map of Dividend Champions exclusive for Seeking Alpha readers, providing interesting candidates for further analysis. After our recent coverage of wide-moat Altria (MO), we now take a look at another dividend darling AT&T (NYSE:T) to see whether the monstrous entry yield justifies initiating a position at current levels.

In light of Buffett's teachings distilled from his 50+ years of shareholder letters, our analysis is based on the three dimensions that truly matter: operations, capital allocation, and valuation. But before we do that, let's jump into what makes AT&T an interesting candidate today.

Image Source

So what's the story with AT&T?

AT&T is the second-largest U.S. wireless carrier with 40% contribution to the company's overall revenue, followed by another 25% from its consumer and entertainment segment (including the DirecTV satellite television business), while WarnerMedia now contributes a bit less than 20% to the company's top line, with fixed-line business communications accounting for the majority of the remaining 15%. Becoming a diversified telecom and media conglomerate definitely came at a price for AT&T, driven by ill-advised acquisitions of the past, pumping its debt load and overall complexity to nosebleed heights. Besides continuous investments in growth areas like fiber-optic and 5G networks, the company's heavy bet on the "content is king" approach will be further strengthened with the July 1 appointment of previous WarnerMedia head John Stankey as new CEO, while the success of its recently launched streaming service HBO Max will be a key factor to watch going ahead. With the change at the helm at AT&T, a long-awaited divestiture of the struggling pay-television business might be finally in the cards as well, while debt reduction and ongoing commitment to dividend payments remain top priorities for the company.

Analyst’s Disclosure:I am/we are long T. 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.