You’re Not Wrong Being in AT&T, It’s Just Not for Me
AT&T (T) has been in the news lately. Sure, they and rival Verizon (VZ) are kind of fighting with Secretary of Transportation Pete Buttigieg and the airline industry about 5G. Not sure how consequential that is. More interestingly as this dividend stock has become less dividend focused, and has been sold off by the public (I sold my shares many months ago), Wall Street appears to be gaining renewed interest. Hmm.
First… in November, AT&T and Verizon agreed to partially resolve a debate around aviation safety by reducing 5G transmissions around airports and approaches to airports for six months. In a letter dated last Friday (New Year’s Eve), Secretary Buttigieg wrote to AT&T CEO John Stankey and Verizon CEO Hans Vestberg requesting a two week delay to the planned rollout of new 5G wireless services on January 5th. The letter states… “Failure to reach a solution by January 5th will force the US aviation sector to take steps to protect the safety of the traveling public, particularly during periods of low visibility or inclement weather. These steps will result in widespread and unacceptable disruption as airplanes divert to other cities or flights are canceled, causing ripple effects throughout the US air transportation system.”
The answer returned to the Secretary was a flat (or maybe not so flat) “No.” The two wireless carriers offered to adopt the same C-Band exclusion zones already in use in France for six months. The effect would be to reduce C-Band signal levels by at least 10 ten times on the runway, or during both the first mile after takeoff and last mile of approach. In the return letter, penned by both firms, they write, “The laws of physics are the same in the United States and France. If US airlines are permitted to operate flights every day in France, then the same operating conditions should allow them to do so in the United States, as we propose in the technical details attached to this letter.”
On December 16th Morgan Stanley’s four star (at TipRanks) analyst Simon Flannery upgraded AT&T from “equal-weight” to “overweight” as recent performance had driven valuation down to newly attractive levels. Flannery sees three catalysts for the firm going into 2022… a solid financial outlook, the already mentioned valuation story, and the Warner Media/Discovery (DISCA) spin-out/merger which could close as soon as mid-year. Flannery also notes the likely ability of the firm to keep margins where they are as wireless service related revenue continues to grow and the firm moves deeply into its $6B cost cutting program. Oddly, with all of the kind words and the upgrade, Flannery cut his target price from $32 to $28, and he still sees T-Mobile (TMUS) as his top telecom name for 2022.
Within days, Barclays’ own four star analyst Kannan Venkateshwar upgraded AT&T from “neutral” to “overweight” with a $30 price target. Venkateshwar also notes multiple catalysts that for him include a counter-mainstream view that post-paid phone growth might not slow down in 2022 as well as the spin-out/merge with Discovery. Venkateshwar notes that if the deal is structured as a split-off, this could significantly shrink the total of AT&T shares outstanding. The view stated is that AT&T closes the gap with Verizon during 2022.
What I found intriguing was the piece put out by Citi’s quant team just ahead of Christmas. Citi five star analyst Michael Rollins has a “buy” on the name and a $29 price target. This is separate from his view. The quant team screened for the top five names under four ‘disciplines” going into 2022 that are also rated as “buys” at the bank and perceived as less crowded trades on Wall Street. Those disciplines were Value (likely to lead the market with the 10 year Treasury yield rising and Omicron milder than feared), Growth (provides protection if economic growth slows or lockdowns happen), Quality (can help manage through significant difficulties, inflation, and shifting Fed policies), and Dividend.
Well, AT&T did better than many might have thought on these screenings. AT&T placed fourth on the “Quality” screen, and first on the “Dividend” screen. This Friday, AT&T will go ex-dividend. Shareholders will receive a quarterly payout of $0.52 on February 1st, which is a yield of almost 8.5%. On this front, when the firm announced the deal with Discovery in May, the company announced that it expected to cut its annual dividend payout ratio to 40% to 43%, with expected free cash flow of $20B or more. In September, the firm projected that 2023 dividends would wind up being between $8B and $9B. Some analysts see a rough 5% cut from today’s $2.08 per share to something like $1.97 in 2022, and then maybe another 7% cut in 2023 to $1.84. Still a dividend aristocrat no doubt. Just not 8.5%, At these prices, a “paltry” 7.3%.
I think the folks that fear the coming dividend cuts are probably out of stock. Nobody who is in a stock for the dividend alone gets out because the yield drops to 7.3%. They’re not getting that kind of yield too many places. I will be honest. I don’t love the balance sheet. Total assets still outweigh total liabilities, but current liabilities are considerably larger than are current assets. Total debt is almost 10 times the firm’s cash balance. The current ratio is just about 0.7, which should ring some alarm bells.
A lot is riding on successfully pulling off the Warner Media deal. This firm, in my opinion, can not afford to maintain the dividend at the levels discussed unless the refocusing of the firm on core businesses works well. I am not opposed to the idea of getting long AT&T, just understand what this is. This is not a blue chip that pays a nice dividend. This is a speculative name that is going to pay nicely for as long as it can to keep you around. You’re not wrong being in this name. It’s just not for me. Not yet anyway.