Forget AT&T, Buy These 2 High-Yield Investment-Grade Telecom Stocks Instead

Summary

• T is a retiree favorite on Seeking Alpha.
• We are not convinced there is real value there.
• We prefer these two undervalued high yield telecom stocks instead.
• Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

AT&T (T) is a retiree favorite on Seeking Alpha. While this is certainly understandable given its long and storied history as a reliable dividend grower and attractive yield backed by a stable, utility-like business model in an age of record low interest rates:

We do not share the conviction that it is meaningfully undervalued. In fact, as we laid out in Why We Are Staying Out Of AT&T, the stock is actually expensive on an EV/EBITDA basis:

Source

Compared to its historical average EV/EBITDA of 6.18x, its current EV/EBITDA is 7.44x. Even on a more recent EV/EBITDA basis, its 5-year average is 6.96x. If it were to be priced equal to its 5-year average EV/EBITDA, the stock would have to trade at $26.25 (compared to its current $29.90).

How is this possible when the dividend yield is near an all-time high and the P/FCF multiple is also at a decade low?

As we detailed in The Chickens Are Coming Home To Roost At AT&T, the answer is simply: massive leverage.

After essentially burning $67 billion on its failed acquisition of DirecTV, management is now reaping the consequences by having to write-off an embarrassing $15.5 billion for the business and is even trying to sell a minority stake in the business at a massive loss. Of course, this isn't the only capital allocation blunder they have made in recent years as evidenced by the additional $3.4 billion in write-offs that they made in 2020. Looking ahead, it wouldn't shock us if more of the same took place as T still has $150 billion in combined goodwill and other intangible assets on its balance sheet along with another ~$150 billion in long-term debt thanks in large part to their massive deal for Time Warner Inc.

Source

If T is an overleveraged and - arguably - overvalued

Analyst’s Disclosure:I am/we are long TEF. 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.