Summary
AT&T’s price continues to fall.
AT&T’s culture of debt is a problematic.
AT&T’s management explains their special dividend in 2022.
This idea was discussed in more depth with members of my private investing community, Growth Stock Renegade. Learn More »
PM Images/DigitalVision via Getty Images Where Are We Now?
I don’t think anyone is surprised about AT&T ( T ) right now. What I mean is that there is no love, no momentum and no cheer. The market is clearly against T right now and the price shows it: T is down well over 40% in five years. Even worse, the dividend has not even allowed investors to tread water. Buying at $38 back in late 2016 wouldn’t have worked out very well. Here’s the simple math. $38 buy price – $23 today’s price = $15 “loss”
Five years of dividends = $8 “profit”
Therefore, even with a hefty dividend, investors are still down $7. So, with all dividends added up, that’s a loss of about 18%. The dividend dripping and related compounding isn’t good enough here. If all dividends were reinvested investors are still looking at a loss 12-15% over the last five years, depending on the exact buy prices, tax implications and so forth.
Now, the main point here isn’t to pour salt in an open wound. Trust me, I feel the pain. I’ve been in T for about six years. I’m getting at the fact that T’s dividend has not provided any protection, or true upside whatsoever.
That said, during my recent analysis, something quite interesting popped up. It’s very directly related T’s dividend. In this article we’ll take a fresh look a T’s dividend in light of debt, and the spinoff coming in 2022. And, I won’t delay the real punchline. T’s management sees the WarnerMedia-Discovery transaction as being equivalent to a special, large, tax free dividend. How Did AT&T Implode?
I won’t spend much time on T’s implosion since I’ve already covered this topic . Here’s what I wrote: AT&T’s new standalone company can be explained by a single word: debt . Plus: AT&T has been buying and merging with other companies for a long time. Everything gets more complicated, from brands, to value proposition, to leadership. Of course, all of this activity confuses the market too. But worst of all, the debt just keeps going up and up. And then this: Clearly, debt has been increasing faster than equity. Therefore, the company is being financed by creditors rather than by internal positive cash flows. Third, here’s how AT&T’s debt is starting to wash up on the beach. That is, wave after wave of debt is coming due quite soon. I bring this up because if the new T doesn’t change how it manages debt then I suspect the culture of debt will likely eat away at T over time. That is, if debt piles up again, then we’ll just end up back where we started. Sure, it might take many years but it’s still a path of destruction if leadership doesn’t adjust.
We’ll get to the debt load in a minute. First, I want to point out that leadership is pounding the table on cash flows. And that’s we’ve either closed or announced 55 billion in asset transactions. In the last 12 months, this business has delivered over $26 billion of free cash flow. And we’ve got the capital structure now in place that will support the investments that we need to make in the communications company in our wireless network with the deployment of C-band as you’re well aware of, and our 5G expansion as well as our fiber investments as we announced our goal to drive more than 30 million passings by 2025 as we restart the second major investment wave on our fiber portfolio. Don’t get me wrong here. I love the cash flow! However, that doesn’t change the fact that debt is still a problem. And, future growth is highly dependent on capital investments, and almost certainly debt. Some things never change.
The flip side is that after the WarnerMedia transaction, T expects : Significant debt reduction with Net Debt to Adjusted EBITDA 2 in the 2.6x range after close, moving to less than 2.5x by year end 2023 Furthermore, they’ll consider share buybacks once Net Debt to Adjusted EBITDA is less than 2.5x. They think they’ll be below 2.5x by the end of 2023. We’ll see. There are still many moving parts.
So, the balanced view is that T’s handling […]
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