AT&T's Recent Dividend Highlights Its Strength, But Options Trading Offers More Potential

Summary

• AT&T had a spectacular 2020, despite the lack of reaction from the market. That's despite almost $45 billion in net investments into the business.
• The company's dividend is strongly secure at nearly 7% annualized, and the company plans to redirect additional cash into debt repayments.
• The company has the potential to drive consistent and reliable double-digit shareholder rewards despite market conditions, making the company a reliable investment.
• I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Photo by Ronald Martinez/Getty Images News via Getty Images

AT&T (NYSE: NYSE:T) is a company we've consistently discussed, especially its record-breaking spectrum auction recently. Followers might wonder why we continue to discuss the company, despite its stagnant price movement. However, our answer is simple:

The market can remain irrational longer than you can remain solvent.

As we'll see throughout this article, AT&T's continued business execution, such as its recent dividend declaration, will enable the company to continue driving long-term shareholder returns.

AT&T Growing Industry

AT&T operates in growing industries, where it can gain more customers, despite the prevailing views of the company.

AT&T Positioning - AT&T Investor Presentation

AT&T has a variety of customers across its business spectrum. This includes numerous large enterprise/public sector companies, ~128 million households that watch TV, numerous young adult/students, travel, and gamers. AT&T faces strong potential competition for these customers, however, it has the ability to dramatically increase its business size and capture these businesses.

It's also worth noting that these businesses/customers are growing rapidly.

AT&T HBO Max

One of AT&T's most impressive growth regions is its HBO Max business which has already surpassed all expectations.

AT&T HBO Max - AT&T Investor Presentation

AT&T saw more customers added in the final 7 months of 2020 than the previous decade, showing the strength of HBO Max. The company grew from a pre-launch bottom of just over 33 million subscribers, by 25%, to almost 42 million subscribers by year-end 2020. That massive growth represents a new trend for the company.

The company originally forecasted 75-90 million subscribers by 2025. Since then, that forecast has changed to 120 million subscribers + 30 million (potential) from alternative markets. That's a near doubling of the company's forecast. Additionally, ARPU is expected to be growing steadily, meaning, by 2025, when breakeven is reached, this could be >$20 billion annual revenue.

AT&T 2021 Guidance

Putting this together, AT&T's 2021 guidance highlights the company's strength.

AT&T Guidance - AT&T Investor Presentation

AT&T has ~$215 billion in market capitalization and finished 2020 with ~$150 billion in debt, for a total enterprise value of ~$365 billion. The company, in 2021, expects ~1% revenue growth and stable EPS, impacted by increased HBO Max investment. The company's capital expenditures are expected to be $18 billion with $21 billion in gross capital.

However, it's worth noting the company's higher capital spending will partially come with First Net reimbursements. Past this massive spending, the company expects to have $26 billion in FCF, enabling it to continue a near 7% dividend, while reducing debt. That FCF is a ~12% yield on market cap and more than 7% on EV showing the company's strength.

AT&T Financial Plan

The company's core financial plan, past this near 7% of dividend, is debt pay-down. Impacting this is the company's massive, but necessary, $27 billion in spectrum spending.

AT&T Debt - AT&T Investor Presentation

AT&T, post its TimeWarner acquisition had $177 billion in net debt. By end of year 2020 that was expected to be ~$148 billion. Going into 2021 the company's post dividend FCF ($11 billion) along with other financing activities (~$6 billion) and $23 billion in spectrum due will make net debt ~$154 billion. The company would have ~$4 billion in spectrum for future spending.

However, the takeaway here is that the company, after massive and necessary spending will end 2021 with ~$154 billion in net debt. It'll have the financial ability to pay down ~$11 billion annually and each year it does so it'll decrease its interest expenditures by ~$500 million permanently. That doesn't count the overall growth in the company's value.

AT&T Shareholder Return Potential

AT&T's shareholder return potential here is significant. The company can, for example, pay its debt down to $20 billion in a decade. That'll permanently increase its FCF by ~$5 billion as a result of its lower interest expenditures, not counting the overall market recovery in FCF.

That paints a picture of a company, in 2031, if the company continues focusing on share repurchases, of a cash flow giant. The company can continue to pay 7% in annualized dividend for the entire time. Then, in 2031, it'll be positioned with $20 billion of net debt and annual FCF (assuming no further COVID-19 recovery) of $31 billion. That points to a market cap well above $215 billion.

The company needs minimal share appreciation to generate double digit rewards post a 7% dividend. More so, it's worth noting that $31 billion assumes no further growth, despite the company's expectation of much faster growth from HBO Max as it reaches profitability from heavy investment in 2025. The company's other businesses will also keep growing.

Based on the company's pre-COVID forecast of 2023-2025 FCF ~$31-32 billion, the company's 2031, post debt pay-down FCF, could be $35-40 billion. That could help the company, with its lower debt, drive much stronger long-term shareholder returns.

Options Trading

For those interested in investing in AT&T we recommend using an options-based investment strategy for immediate yield.

A January 2022 $30 cash secured PUT is currently trading at ~$2.9/share. That means you can earn a 10% yield by investing for ~9 months (~13% annualized). If prices go up, you keep that 13% yield, if they go down you get a chance to invest at a breakeven of ~$27/share, a much better deal than the $30.5 current price.

AT&T Risk

AT&T's risk is that it operates in a competitive environment. The company is seeing a growing competitor with T-Mobile (TMUS) and could see competition from numerous other major players. Some larger companies are getting into streaming or potentially the cellular business. Well capitalized competitors is a risk AT&T will continuously face.

Conclusion

AT&T has an impressive portfolio of assets and despite the massive overhang of COVID-19 through 2020, has continued to execute well in its core businesses. The company has massively expanded its HBO Max forecasts, and has numerous other growth opportunities, such as its fiber line home internet businesses.

The company operates in a competitive industry. Despite this, the company is in an incredibly strong financial position with significant FCF. The company is currently focused on paying down debt and will be able to continue paying its dividend while focusing on driving significant long-term shareholder returns.

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.

Comments

[Queen Anne Investor]

Nice article. Not sure about the selling put strategy. You miss out on the dividends and the potential big price appreciation. In stable high yielding large caps the option prices are too low to make the risk worthwhile. Just buy the stock and collect the dividend.

[Tykob]

I never could understand the hype around HBO Max. It comes included with my ATT high speed internet, but I rarely watch it. Occasionally they'll have a new movie release, but is that a reason to subscribe? How many times do you want to watch Godzilla vs. Kong (if ever)? I would simply never pay for it.

[SPAC lover]

@Tykob if everyone likes you, Netflix goes belly up. there are online companies business model based on people watching other to play online games, so-called esports. are you watching that? guess no.

[SPAC lover]

@Tykob maybe you can let me watch it for you

[nerd_rage]

@Tykob There's the HBO back catalog, new HBO shows, the Warners back catalog, etc. But we still have no real inkling of how much traction HBO Max has gotten.

How many HBO customers have activated a free account, how many people are watching free accounts that come from ATT high speed internet, and how many people are actually forking over $15/month that they otherwise would not be spending? That last figure is by far the most important in gauging the actual success of HBO Max.

[Hopeful17]

I just keep dripping the dividend every quarter. At around a 7% dividend, I should have double the shares I currently own in close to 10 years.

[User 31614085]

@Hopeful17 I think of it as a substitute for money I used to keep in cd's..no principal accretion expected but a very nice interest payment...

[nummer12345]

@Hopeful17 Exactly, good reason to own AT&T

[nummer12345]

@Hopeful17 There are alot of people that do not understand dividends. they would rather options trade hoping a quick return and often fail. Dividends make you money when you sleep.

[San Marzano]

AT&T owns CNN. Dump AT&T. Promote honest journalism!

[SPAC lover]

@San Marzano making money, not politics.

[dspringer44]

@San Marzano honest journalism is awesome. I’m guessing you don’t follow much.

[swift93]

@San Marzano Goodbye.

[deadhead213]

I have doubled down on T and continue to add every month. It’s worth buying to collect the 7%.

[jnpfl]

I prefer selling covered calls on my T shares. I sell one month out, at $1 to $2 above market. Since there is almost no chance of the stock appreciating $2 in a month I simply pocket the modest call premium at expiration to supplement my quarterly dividend.

[georgetrader]

@jnpfl I try to do the same, but more conservatively by going further out of the money to lessen the risk of getting called away and lose the dividends. But, if they do get called away, I'll look for the next opportunity to sell puts to collect premium and not afraid of getting assigned.

[User 44279746]

@jnpfl I own a fair amount of T and usually don't sell calls against it. However, I felt a month or so ago that the tide was turning in T's favor and the technicals support it. So I bought some Apr 16 $29 calls, something I usually don't do. With the dividend coming up, unless we have a big drop in the next two days, I'll be exercising them on Wednesday to capture the dividend. There will be a disappointed T option seller when he gets the exercise notice that he won't be getting the dividend.

[SPAC lover]

@msbreb1978 frankly, with the low beta, there is not much benefit buying T's short-term call. I am sure you would get a better deal buying T stock at the time of your buying T April call. You would pay less.

Exercise on Wed. is slick. Sometimes, you have to pay attention to ex. dividend date.

[SPAC lover]

It is actually very bad idea to sell $30 put.

You get about 3% upside vs. owning T, with all the down side.

For high dividend stock with low beta stock, that is the wrong thing to do. The author is too simple, and too naive.

If anyone like T dividend, better way is to sell it's weekly put at 29. 28, 27. T is range bound. This way, you bought T at lower end with additional put money. Or you get free put money. Then you can sell a coveted call at 35 , 40, 45 depending on your time length.

[Peter Pham Wesley]

@wit witty I’m a very similar thinking with what you wrote. AT&T has been trading at such a tight range for sometime now.

The only down side is, unless it’s a strike price that is very ITM, the weekly premiums tend to be kind of smallish for AT&T.

[SPAC lover]

@Peter Pham Wesley true. but free weekly money is better than nothing. however, you do have to use a brokerage that does not charge any options trading commission or contract fee. only a few do that. send me a private message. I can refer you to it.

even if it is 20 cents. 20 cents X 50 weeks=$10.

i bought T at $28, $27.5, $27. when you sell a put, you tend to buy T on its lower side. T's solid support at $27 gives you downside protection. When I sell covered calls, I go the bigger gap, such as $2 to $3 in a weekly expiration so I know I would not give away T easy. This way, you could easily get 20% return and still keep T stocks.

[It is a Top]

@wit witty

"even if it is 20 cents. 20 cents X 50 weeks=$10."

But it has to be cash secured.

That's $10 at a strike price of $27 on $2,700 cash for a year. That's 0.0037 return, or .37 percent.

Less than 1% to tie up at best $2,700. You would do better with a savings account.

"This way, you could easily get 20% return and still keep T stocks."

I don't see how that would work.

[BigTheta]

HBO Max is a sleeping giant and this year its gonna dump on disney and netflix my prediction. Look at the movie line up. Matrix 4 and Dune are just the beginning

[nerd_rage]

@BigTheta Matrix 4 and Dune have the potential to be new/revived movie (and HBO Max series) franchises. Let's see how good T is at entertainment brand management. We should be seeing Dune 1, 2, 3 etc and spinoff series on HBO Max if they are doing their jobs.

Regardless, for HBO Max to threaten Netflix or Disney+ in any significant way is a very tall order. Let's give them a simpler task: don't screw up Dune.

[BigTheta]

IV is incredibly low, you dont want to sell puts, you want to buy calls.

[Rainy Decade Investing]

@BigTheta yes, wrong time for selling long duration. Volatility expansion will put this trade under water.

OTM debit spreads have a higher probability of profit than a simple call purchase.

[BigTheta]

@Rainy Decade Investing True, less upside though

[Rainy Decade Investing]

@BigTheta it depends on what you want. a couple of low probability home runs (the long calls), or a lot of high probability singles (the debit spreads).

[polymath ryan]

I sold a put on 30 when it was at 27 a few months ago. Good thinking!

[Basit Saliu]

AT&T's gaming business could become a big growth area in future when 5g and HBO Max are already paying off. AT&T's sport business is also another one to look out for. AT&T have 6,000 owned stores they could convert that into WB stores for merchandise etc. AT&T is so fortunate to own Mobility and WarnerMedia. AT&T FCF and OCF is so huge they will get through these hard times. Go T to $50 by 2024.

[User 40190236]

@Basit Saliu I hope they don’t sell the Gaming unit.
V long T

[Basit Saliu]

@HM JOSHI T is no more selling the gaming business nor the sport business.