AT&T: The Bottom Is In
Summary
- AT&T has had a tough 2021 but produced fairly decent numbers. 2022 should yield even better results and the stock should see a price increase over the next year.
- AT&T will see a dividend cut due to the spin-off and investors can expect to see a 5-6% yield, which is still fairly strong.
- I believe the bottom is in for AT&T, bring on $30 and beyond.
Toby Jorrin/Getty Images News
AT&T (NYSE:T), like most of the global population, has had better years. The stock closed the year down about 16% and touched levels not seen since 2009. The good news is that I believe the bottom is in and the company is poised to see a much better 2022 and outperform its peers. There is still a lot of uncertainty with regards to the spinoff situation that should be happening sometime in 2022, but I do believe once that is behind the stock, we will really start to see some momentum. I am bullish on AT&T.
How Is 2022 Shaping Up?
What we can expect out of AT&T in 2022 is constant growth every quarter. Especially with regards to cash generation and free cash flow. Looking below we can see free cash flow, cash from operations, and EBITDA quarterly over 2022. What I see here is consistency, predictability, and constant growth.
Back in the Q3 earnings call, I think CEO John Stankey nailed it as best he could.
We're in the early innings of transforming the Company and believe that we have significant opportunity ahead of us to expand, share in our focus areas and drive better returns, including sustained earnings growth. We continue to strive to earn your confidence one quarter at a time, delivering operating performance and shows our momentum is real and sustainable.
There is still a lot up in the air with regards to when we will see the spin-off between Discovery and Warner Bros go down, but what is encouraging is the focus on sustainable growth beyond that. The company will have a much better-focused attack and that will benefit both the company and the shareholders in the long run. What's left will be a pretty boring company, but boring is good for the reasons I have outlined here. Investors like predictability, and I am sure most would agree that AT&T has been anything but that over the last 10+ years, outside of the dividend that is.
This can be confirmed by some bullish sentiment coming out of analysts. Barclays recently upgraded the stock to overweight on the back of multiple catalysts.
The company has a number of things going for it: the highest growth rate in history for post-paid subscribers, it added more share than others in the space; a simpler story due to recent asset sales; potential for additions to broadband subscribers, and acceleration for the first time in "years;" along with government subsidies, a stable average revenue per user in 2022, AT&T shares are poised to close the gap with Verizon (VZ), which Venkateshwar notes is at the biggest discount "in over a decade."
AT&T still has some work to prove that they are a new company and the way they conducted business in the past is behind them, but I do have full confidence that they will keep the business clean and simple this time around. AT&T is here, and here to stay. I feel confident saying that the bottom is in, and the rebound is well underway.
How Is The Dividend?
Currently yielding at about 8.5% it looks very attractive. New investors must be aware that a cut is coming. This cut is due to the WarnerMedia spin-off. I'm going to attempt to calculate what one could expect to get out of the dividend after the cut.
What we know is that they plan to have a payout ratio of roughly 40%-43%, on an expected cash flow of $20 billion+, which is very healthy. This means there will be $8-$8.6 billion to hand out to shareholders. There are currently 7.141 billion shares outstanding. Therefore we will see somewhere between $1.12 and $1.20 paid annually.
Now we have to look at the spin-off to determine what dividend will actually be worth. We know that Discovery stock is a 29% owner of the future WarnerMedia company. We know that all of Discovery is worth $11.739 billion, if we take the $11.739 billion and divide it by 29%, we get $40.479 billion, which is the implied value for WBD stock.
Still with me? Now AT&T shareholders will own 71% of the $40.479 billion valuation for WarnerMedia. If we multiply $40.479 billion by 71%, we get $28.740 billion, which is what their stake is worth. Now we can divide this by the outstanding shares (7.141 billion), and we get $4.02. That is the price per share for AT&T's stake in WarnerMedia.
Finally, we can take the current share price of $24.60 and subtract $4.02 and get to $20.58. For simplicity, let's take $1.15 paid per share, and we get a 5.59% yield. I think most investors could live with a 5-6% yield given what that means for the balance sheet. We will likely see the dividend increase again slowly once all the dust settles and the company gets back to work.
How can I be so sure that we will see future increases? Well, it comes down to net debt. AT&T said their leverage will decrease to 2.6x post-merger. From there, they target 2.5x by the end of 2023. This is all encouraging as then, and there is a lot of mess to undo here, but if shareholders can be patient through the merger, I do feel confident the stock and dividend for that matter will turn a corner and get back to the regular increases shareholders are so used to.
What Does The Price Say?
I think my previous article on AT&T which was titled "Early Innings Of A Long Game" was the perfect title for where AT&T is at. Some of which were covered above. With regards to price action, I preached patience, wait for the positive signal as there was likely a bit more downside to come. I can now confidently say that so long as nothing fundamentally changes, or we get a black swan event that kills the entire market (Asking for a lot, I know...), that the bottom is in on AT&T. One of the positive signs that we can see, even though the price is ridiculous, is the fair value moving higher over the last few months. When I wrote on the company in late October, the fair value was calculated to be $97.09, and the share price was just over $25. This means good things are happening, we just need to see the fruit before we get too excited. No, I do not think this is a $100 stock. But I do think the road back $30 this year, with a medium-term target of $40.
(Source: Simplywall.st)
So what has changed technically that I can say that we have found a bottom? I'll start with some of the moving average action we have seen recently. The 200-day moving average is the big one here, and we are still a long way from making another attempt at a break there as we trade about 9% from it as we stand today. But what is encouraging is the 50-day moving average. The stock has crossed it and held it for the first time since the big drop in mid-May. The other encouraging piece here is that the moving average has started to have a positive slope to it. So long as the stock can hold it, it is a bullish signal and should help push it towards the 200-day moving average.
(Source: TC2000.com)
Now let's look at the support on the bottom side. We saw the stock fall to a low of $22.02 on December 15th. This is the lowest the stock had been since 2009. Turns out, there's quite a bit of historical support there as we can see below on the weekly chart. If you zoom out even further, there is even more back in the '90s. This is very encouraging and gives you a pretty good stop if you want to have a stop in on your position. I'd probably move it a bit lower to allow for a 15% or so downside from your entry given chances are you are more excited about the yield than any capital gains. A break any lower would be either a sharp rebound (double bottom) or a free fall to god knows where.
(Source: TC2000.com)
The biggest hump we have to see AT&T get over on the recovery is right around $26.87. Again, looking below we can see support/resistance dating back to the early 2000s. This is about 9% from current levels and a break above this mark would be very bullish and likely mean it is headed for $30.
(Source:TC2000.com)
Wrap-Up
As you can see, there is a very good case to be made for AT&T to have a strong 2022 and beyond. The company has worked hard to get to a spot where the recovery can officially begin and I think we will start to see some of the early fruits of that labor in 2022. I will reiterate that we are still in the early innings of the game here, but everything is looking promising. I do think the stock is still attractive even if the yield gets cut to the 5-6% range when it's all said and done. The company will continue to pay down debt and increase the dividend annually as it has for what seems like forever. Be patient, the tides are turning. Happy New Year! All the best in 2022.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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Comments (98)
If I may ask, how would you know that?Would you happen to know what $VZ and $TMUS' long term plans are?
Many holders in the $27.50 range for more than to 2 years just want out before the div cut expect selling there as they clear out.
In the 90s I talked to guy in the business who said they were so stuck in the past copper wire and switchgear that optical fiber was something they just could not get their heads around. They would lay optic like old copper and then when multiplexing came along they and they saw 1000X the capacity the fear was how do you price the calls with this volume suddenly available. Sure was not how do we introduce new ideas to take advantage of it.
He also said copper was subsidized all over the country but calls were priced like they paid for it. It will be long forgotten when they roll up all that copper that the taxpayer laid it down.
