AT&T: No Blood In The Street Situation
- AT&T's share price recently hit a decade low. We see this disappointing performance at a time when the markets are near their historic all-time highs.
- Shareholders who bought shares of AT&T in 2009 have seen a meager return on their invested capital.
- However, taking dividends into account puts AT&T's image as a return killer somewhat into perspective.
- E.g., investors who put shares in their portfolio for roundabout $22.5 in June 2009 still had an annual return of 5.8 percent.
- But is this now a 2009 situation again? Well, I doubt that we are looking at a blood on the street situation like the one that prevailed in 2009.
AT&T's (NYSE:T) share price recently hit a decade low. We see this disappointing performance at a time when the markets are near their historic all-time highs. In fact, AT&T is now where it was at the height of the financial crisis. Shareholders who bought shares of AT&T in 2009 have seen a meager return of -12 percent (excluding dividends). By comparison, the S&P 500 has gained 300 percent. Verizon (VZ) also performed much better, with a capital gain of over 70 percent, excluding dividends.
Of course, the view is somewhat skewed as we also need to consider the dividends that AT&T generously pays out to shareholders each year - especially when we compare AT&T to the major indexes. Currently, the dividend yield is more than 9 percent. Accordingly, AT&T is attractive to cash flow-oriented investors. But here, too, there is some disillusionment. For example, investors certainly thought they would make a good deal with AT&T stock in 2009. But those who bought the shares in 2009, for example, now "only" have a yield on cost of 9 percent too.
Nevertheless, the total return is still positive due to the dividends. Investors who put shares in their portfolio for $22.60 in June 2009 still have an annual return of 5.8 percent. Dividends were the main driver, though, while pure capital gains are negligible. So taking dividends into account puts AT&T's image as a return killer somewhat into perspective.
Fundamentally, the stock looks cheap, but it's not a 2009 situation
From a fundamental perspective, AT&T shares are cheaper than they have been for a long time. The adjusted P/E ratio is just 6.8. Even during the financial crisis, the P/E ratio was significantly higher. So AT&T is trading at crash levels and below that levels. If we look at the last 20 years, the average P/E ratio is higher than 13. In this respect, AT&T stock would be almost 100 percent away from its historical valuation. A massive upside potential.
Getting an annual performance of 6 percent only through dividends as with a purchase in 2009 is certainly not a bad thing. And the low fundamental level is even below the 2009 level. But is this now a 2009 situation again? Well, I doubt that we are looking at a blood-on-the-street situation like the one that prevailed in 2009.
Firstly, AT&T has not managed to grow profits accordingly in a boom-cycle.
In addition, the company carries debt that no investor wants. The Warner acquisition and the expensive C-band financing have resulted in a debt ratio (measured by interest-bearing debt) of over 36 percent. It is particularly disappointing that AT&T promised improvement here in 2019. But the opposite has occurred. The debt ratio has continued to rise in recent years.
The debt ratio, for example, is currently much higher than in the period 2008-2010. In 2010, the debt ratio was just 23 percent (measured in terms of interest-bearing debt). Although the interest rate environment was different during that time, the debt mountain is a heavy burden given a possible reversal of interest rates that cannot be ruled out.
In this respect, AT&T had no choice but to spin off Warner Media and saddle the new company with the bulk of the debt. After closing, the net debt to adj. EBITDA ratio is expected to be 2.6x and 2.5x by the end of 2023.
The problem is that AT&T has destroyed investor confidence and shareholder value on a massive scale. In this respect, the company is now in a phase of upheaval in which shareholders are seriously asking themselves about the strategy for the next 5 to 10 years. In May, I was pretty optimistic and saw AT&T as a classic defensive communications company:
On the other hand, we have the old classic AT&T. What remains is a pure telecommunications company. Over the next few years, AT&T expects to grow its telecommunication business by a low single-digit percentage. Adjusted EBITDA and adjusted EPS are also expected to grow in the mid-single-digit percentage range. Fiber expansion and the acceleration of the 5G rollout remain priorities.
So yeah, welcome back old AT&T. In this respect, the decisive factor in the future will be whether AT&T can grow in its core business.
And initially, there were also signs of growth, as in the last quarter that showed great customer adds:
we continued our strong customer momentum in the third quarter with 928,000 postpaid phone net adds. That's our best net adds quarter in over 10 years. Customers like the strength of our network and our consistent simple offers. Gross adds are up, churn is low, and we continue to take share and grow our customer base.
Our Fiber base also continues to expand. Broadband revenues grew by more than 7%, and we now have 5.7 million AT&T Fiber customers, with 3.4 million of them on 1-gig connections. And we saw sequential growth in our Fiber net adds with most of those new to AT&T.
Nevertheless, AT&T has now put the good figures into perspective and caused uncertainty among shareholders. The gains in customer numbers were mainly due to the stimulus programs. In addition, management has pointed to the strengthened position of T-Mobile (TMUS):
your second point of your question is kind of around this inflated level of postpaid growth that we see here in 2021, and I think this has been a question that's been asked frequently. And there's no doubt that the stimulus programs have put some extra cash in household budgets. And so we're not expecting that level of activity to continue into 2022 and beyond. In fact, in a 3-player market with the integration between Sprint and T-Mobile, we suspect the activity level for postpaid in 2022 is probably going to subside. We're not forecasting it to be as strong as it is this year.
So things are not getting any easier for the company. And that's another thing that makes the current situation different from 2009. The recent growth in sales was based on external measures and liquid subsidies from government programs. It is unclear whether all the new customers will keep their contracts in the event of an economic crisis as we saw in 2009 or whether they will not terminate their contracts. The stock is therefore not attractive despite its fundamental valuation and high dividend yield.
Regarding the dividend, investors have also long realized that AT&T is very likely to cut dividends. After the Warner spin-off, AT&T plans to pay out 40-43 percent of its FCF as a dividend which indicates that AT&T will cut its dividend payout by approximately 20 percent (causing AT&T to lose its dividend aristocrat status). This aspect also differs from the situation in 2009.
I hold shares in AT&T myself. I am happy about the dividends that the company pays out. Apart from that, however, I am somewhat disillusioned. I'm not referring to the share price but management's lack of plan around the Warner Media deal. In any case, I don't expect this to be a 2009 blood-on-the-street situation. Accordingly, I am not greedy about AT&T. That is why I don't have any plans to add more AT&T shares for the time being but instead wait for the next few quarters, the Warner spin-off, and the likely dividend cut.
This article was written by
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