Tim Boyle/Getty Images News Introduction
AT&T ( T ) laid out its plans on March 11, 2022 for business after the spinoff of WarnerMedia. In the spinoff, T shareholders will get about 0.24 shares of Warner Bros. Discovery (WBD) T share they own. When this happens, the price of a T share will drop by about $5.76 (the current value of 0.24 of a Discovery ( DISCK ) share). Also, the dividend will be cut to $0.2775 per quarter from the previous $0.52. Since the spinoff is on track to close in April, the lower amount will be in effect for the dividend to be paid in May.
The media spinoff and dividend cut are really an acknowledgement by management that they have been underinvesting in the base business and need to step it up to retain customers and stabilize revenue per user. These investments mainly involve increasing the coverage of the company’s fiber network and adding mid-band 5G capacity to utilize the spectrum on which the company already spent over $22 billion.
AT&T will see near term improvements from lower interest costs post-spinoff as well as the ongoing operating cost savings program. The company will see modest revenue and EBITDA growth as the fiber and 5G spending begins to deliver benefits. Beginning in 2024 when the network is in a good enough position to step down some of the capex, free cash flow will increase, enabling share buybacks, dividend increases, or opportunistic growth projects.
Following the spinoff, AT&T will be a more focused telco like Verizon ( VZ ) with similar growth prospects and debt levels. Still, the standalone telco, with the share price adjusted for the spinoff, will be valued at only about 7.14 times 2022 earnings. This is a significant discount to the 9.73 times for Verizon. While AT&T’s growth prospects are not exciting, they are more than priced into the stock at this point. T is a buy with a safer but still attractive dividend yield and 25% capital appreciation potential. Investing In Network Improvements
The main driver of AT&T’s strategy is the rapidly growing demand for data spread across a growing number of locations. Over the last 7 years, data download usage is up by a factor of 8 times. Upload usage is up by an even larger factor as work-from-home and gaming applications demand symmetric bandwidth capacity in both directions. This growth is set to continue as the number of devices per location and streaming time continue to increase. AT&T Investor Presentation To meet this high demand for data, AT&T is focusing more heavily than its competitors on expanding its fiber network. Fiber offers similar upload and download speeds and has a lower service cost than wireless at high data consumption rates above ~300 GB per month. As stated in the press release: AT&T plans to double its fiber footprint to 30-plus million locations (compared to 2Q 2021), including increasing its business customer locations by 2x to 5 million. In doing so, the company expects to add 3.5 million to 4 million customer locations each year. AT&T Investor Presentation On the wireless side, the company will begin using the mid-band 5G spectrum that it acquired in auctions last year. This spectrum is suitable for less dense suburban and rural areas where the faster high band or mmWave spectrum is limited by distance. From the press release: The company also expects to enhance the nation’s best and most reliable 5G network by deploying 120 MHz of mid-band spectrum to cover more than 200 million people by the end of 2023. Enabling faster speeds, increased capacity and lower latency, this valuable mid-band spectrum complements the company’s existing 5G footprint, which covers more than 255 million people in more than 16,000 cities and towns. The company is spending a record $24 billion of capex in 2022, up $4 billion from 2021. Included in the $24 billion is $5 billion for the 5G improvements and $3-$4 billion for the fiber improvements discussed here. Customers: Retain Consumer, Grow Small To Medium Business
In 2019, AT&T wireless had 480,000 net adds out of a total 6 million for the industry, or only 8%. In 2021, they had 3.2 million net adds, representing an industry-leading 34% of the total. AT&T grew new adds by focusing more on retaining existing customers than on acquiring new ones. The company’s commercials use the tagline ” Everyone gets the best deals .” Even though the emphasis was not on acquisition, AT&T increased net adds by reducing […]
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