AT&T: Is This Dividend Giant A Bet Worth Taking In 2020?
Investing.com | Dec 03, 2019 13:00
America’s largest telecom operator, AT&T (NYSE:T), has proved a profitable bet in 2019. Despite the worries about its future growth and the stiff competitive environment in which it’s operating, its shares, currently at $37.32, have gained about 31% this year, outperforming the benchmark S&P 500 Index's 24% rise.
However, this rebound, which partly reflects a favorable environment for dividend-paying stocks, doesn’t solve the fundamental challenges this telecom conglomerate is facing: how to produce growth when its core operations are struggling and how to manage its huge load of debt.
The recent involvement of an activist investor, Elliott Management Corp., a hedge fund with a $3.2-billion stake in the company, has provided a lot of fodder to some analysts who are building quite a bullish case for AT&T.
After openly criticizing CEO Randall Stephenson for his blockbuster acquisitions, including its $85-billion deal to buy Time Warner assets, the hedge fund seems to have succeeded in pressuring the board to tweak its strategy and stay away from another mega acquisition.
AT&T’s “peace deal” with Elliott, an aggressive investment fund led by billionaire Paul Singer, includes a commitment to stock buybacks and a plan to appoint two new directors to its board. As part of this truce, AT&T also pledged to conduct a review of its portfolio and pay down debt from its 2018 takeover of Time Warner.
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The telecom giant also agreed to separate the roles of chairman and CEO when Stephenson, age 59, retires. He has led AT&T since 2007 and had recently discussed stepping aside as soon as next year, according to a report in The Wall Street Journal.
The company’s three-year capital-allocation plan released in October also provided visibility and was liked by many analysts. The commitment to retire all of the debt acquired from its Time Warner purchase, along with a plan to spend 50%-70% of its free cash flow after dividend payments on share buybacks, are some of the moves which could propel AT&T’s stock higher and help the company to get back on a sustainable growth path.
But these future-focused details don’t hide the fact that AT&T is struggling in many areas of its business and that its turnaround still faces a long bumpy ride. In the third quarter, AT&T reported a profit of $3.7 billion, down 22% from the same period a year ago. Revenue declined 2.5% to $44.6 billion, showing a widespread weakness across its business units.
In the quarter, AT&T’s entertainment unit shed 1.4 million pay-TV customers, including 1.2 million satellite and fiber-optic-TV customers and 195,000 subscribers at AT&T TV Now, the online channel bundle once called DirecTV Now.
To deal with this perpetual shift of entertainment consumers to video-streaming providers, AT&T is launching its own service next year, HBO Max, by packaging content from its Time Warner assets, and the premium movie and TV brands it owns, such as “Friends.”
In a market which is getting crowded by new players seeking to challenge the dominance of Netflix (NASDAQ:NFLX), it’s hard to predict how well AT&T will fare. AT&T, however, expects the new service to reach 50 million domestic subscribers within the next five years as it competes directly with other media giants, such as Disney (NYSE:DIS), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).
Bottom Line
The rebound in AT&T’s stock this year is the result of a combination of factors, including high demand for dividend stocks, some improvement in its cash position and the involvement of an activist investor who has a reputation for pushing change in troubled firms in order to shore up their share values.
But that recovery, in our view, doesn’t yet guarantee a sustainable turnaround, just because of the very complex nature of the challenges AT&T is facing. For that reason, its stock remains a speculative bet.
That said, AT&T is one of the most widely-held stocks among institutional investors who have their eyes on the company’s hefty payout. At an annual yield of 5.46%, with a yearly payout of $2.04, when savings accounts are paying close to zilch, that attraction alone could be a big deciding factor to buy the embattled telecom behemoth's shares.
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