AT&T is a household name if you are living in the United States, known for its business in telecommunication. Otherwise, you may think it is some tech company. Question: is AT&T a good stock to buy?
As an established business, investors are usually concerned if the company has any further growth prospects. Or that if its businesses are strong enough to maintain its dividend payouts.
Well, today we will break down AT&T’s various operations. And have a clearer idea of its business make-up. In the process, we will ascertain its financial health to determine the sustainability of its dividend payouts. And determine what kind of growth will the company be able to ride on in the coming years.
Business Overview: Is AT&T a good stock to buy?
Source: Statista / Wireless subscriptions market share by carrier in the U.S. from 1st quarter 2011 to 4th quarter 2020
AT&T is a leading telecommunication group operating mainly in the U.S. It holds a dominant share in the wireless subscriptions market of more than 40% in the U.S. This is also the key driver in the group’s business, contributing more than US$72.6 billion in revenue in 2020.
Other than providing wireless services, its Communications operating segment also includes video services, broadband fiber as well as business wireline associated with traditional voice and data services to business customers.
Together, the Communications segment accounted for about 79% of 2020 total operating revenues for the group, or US$139 billion.
WarnerMedia: Is AT&T a good stock to buy?
AT&T is increasingly associating itself to a media and tech company as well. In 2018, the group completed its acquisition of Time Warner. This gave the company the firepower to compete in the race to capture the growing media entertainment market.
Source: AT&T Our Operating Segments / WarnerMedia operations
Since then, the group has classified its media business under the WarnerMedia operating segment. In 2020, it contributed approximately 17% of the total operating revenues, equivalent to US$30 billion.
Source: WarnerMedia / Our Brands
Well, the amount of revenue is comparatively smaller compared to the Communications segment. However, WarnerMedia houses a myriad number of premier brands and franchises that you are probably familiar with.
From CNN, to HBO, and DC, it offers very high quality entertainment and content. Its Warner Bros business is known for producing many television programs and feature films.
Source: AT&T Quarterly Earnings 1Q 2021 / HBO Max and HBO Subscribers
More recently, the company is focusing on growing its business in HBO Max. It is competing head on with Netflix for the pie in the content subscription market. And we saw a healthy increase in the number of subscribers over the past year.
Updates: 17 May 2021, AT&T’s WarnerMedia and Discovery announced an agreement to merge the two to create a standalone company.
Finally, AT&T also provides similar telecommunication and media services to its customers in the Latin American region.
Source: AT&T Our Operating Segments / Latin America – Vrio
Source: AT&T Our Operating Segments / Latin America – Mexico
The company offers mobile services to consumers and businesses in Mexico, and digital entertainment services throughout South America and Caribbean. This segment contributed about 3% to the group’s 2020 total operating revenues worth US$5.7 billion.
Financial Review: Is AT&T a good stock to buy?
Source: AT&T Annual Report FY2020 / Selected Financial and Operating Data
At a glance, AT&T’s business seems to be relatively stable over the past few years. We see a steady growth in revenue over the years prior to 2020. Of course 2020 itself was an unprecedented year, with the coronavirus outbreak having a negative impact on the group’s business. It has particularly affected adversely on its media segment. The closure of cinemas has definitely been a drag to the release of its featured films.
Net Loss FY2020: Is AT&T a good stock to buy?
As a result, FY2020 recorded a net loss primarily due to the higher operating expenses reported.
Source: AT&T Annual Report FY2020 / Consolidated Results of Operations
This increased operating expenses was due to exceptionally high asset impairments and abandonment charge of US$18.9 billion. This is related mainly to impairment charges on its long-lived assets from its video business.
Operating and Free Cash Flow FY2020
Source: AT&T Annual Report FY2020 / Operating Cash Flows
Otherwise, operating cash flows generated for FY2020 remained relatively stable, at US$43 billion, compared to the previous two years.
Source: Stockrow / AT&T Inc Snapshot – Free Cash Flow
In terms of free cash flow (FCF), it recorded a good US$27.5 billion in FY2020. It has remained pretty stable compared to the previous year as well.
Increasing Dividends: Is AT&T a good stock to buy?
Source: Stockrow / AT&T Inc Snapshot – Dividends per Share
Also, you can observe from the chart that AT&T has been raising its dividends over the years.
Source: Yahoo Finance / AT&T Stock Overview
With that, it actually gives you a near 7% dividend yield at the current share price of around US$30.
So, all these seem to indicate that AT&T is a pretty big and stable business that pays a good dividend.
Rising Debt Levels
Source: Stockrow / AT&T Inc Snapshot – Operating Cash Flow to Debt
However, on closer look, you will realize that the group has seen its debt levels rising substantially over the years. It is now to more than US$180 billion currently.
This is something that investors need to take note.
Source: AT&T Annual Report FY2020 / Consolidated Results of Operations
Observe that interest expense in FY2020 works out to be nearly US$8 billion.
On the other hand, the company paid out approximately US$15 billion in dividends for the full year of 2020.
Recall that the group’s free cash flow in 2020 was about US$27.5 billion.
This means that the remaining cash that AT&T has to reduce its debt works out to be US$4.5 billion. On a relative scale, it is considered low compared to its debt of more than US$180 billion.
If interest rates rise in the future, then the company may have issues reducing its debt. Nor will the company be able to commit to an ever-increasing dividend payout.
On the other hand, there’s limited growth prospects for the group’s telecommunication business. As a result, the market is not inflating its share price at the moment.
Other growth areas that AT&T is trying to push, such as its HBO Max subscription under its media arm, is too small to move the needle at the moment.
Conclusion: Is AT&T a good stock to buy?
Source: Yahoo Finance / AT&T Valuation Measures
Therefore, apart from the company’s relatively high debt levels, there’s not much growth prospects currently. Hence, I believe this is why it seems that the market is valuing AT&T’s share lowly. Its forward Price-to-Earnings (P/E) ratio works out to around 10, based on the share price of US$30.
Seems like a reasonably valued company if you are ok with the 6-7% dividend payout every year. But of course, bear in mind the debt levels it has. Also, understand the associated risk if the interest rate goes in the upward direction.
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