Summary
The coming spinoff appears to mark the end of disposing of noncore businesses.
Income investors may act upon their feelings to miss a decent opportunity for at least some of them.
Free cash flow is likely to grow in excess of the business growth.
The capital requirement guidance may reflect that the company fell behind or is about to fall behind the competition.
The chances of management focusing the business to become a better competitor are excellent.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
Justin Sullivan/Getty Images News AT&T (NYSE: T ) is spinning off a considerable amount of the company to Discovery ( DISCA ). Now there is some concern about the growth rate and the new dividend coverage that result after this spinoff. Such a discussion is definitely relevant. But sometimes that discussion fails to take into account the goals of management. That failure may result from the feeling that management abandoned income investors through their recent actions. But such a discussion without looking at everything objectively is far more likely to punish the investor than it is management.
Investing at times requires that feelings go “on the back burner”. There is nothing wrong with acknowledging that a certain management decision hurt the potential of an investment strategy a whole lot. But it is extremely important that the action taken as a result of that feeling not “double down” and cause an investor to miss an excellent forward opportunity in the investment. AT&T Outline of Potential Cost Reductions While Focusing The Business (AT&T Analyst and Investor Day March 2022.) The basic management message appears to be that management lost its focus while trying to be too many things to too many people. As a result, the business became bloated and a lot of things were not done well. The recent financial transactions were made to refocus the business on the core businesses of the company. Now the next part will be to remove excess parts of those core departments so that the company becomes streamlined enough to successfully compete as a well focused competitor.
If management is successful in this task (and that is also the main risk), then earnings are likely to grow faster than revenues for a few years (as will free cash flow) as that streamlining process continues. The problem with large companies is always an attempt by management to “rush” to meet some self-imposed deadline without measuring the cost of that artificial deadline as this process proceeds. Sometimes that results in at least one more refocus attempt. Logistics are always challenging in large companies, and this company is by far one of the biggest large companies.
As with any other business combination or spinoff, this refocus project is likely to result in a fair number of nonrecurring or one-time charges. Layoffs and hiring freezes are also a good possibility. It could take at least six months to a year before the business progress itself is the main item on the quarterly reports. AT&T Description Of Changes In YOY Free Cash Flow (AT&T Analyst & Investor Day March 2022) One of the indications of potential neglect is the need for the capital budget shown above. It may in fact be an indication that the company is either about to fall behind competitors or already fell behind the competition. Probably investors need to press the company on more details of future capital needs.
While AT&T itself is seen as a utility, the requirements of customers are changing rapidly. So, the business may need a certain capital level in the future that management has yet to acknowledge. High speed internet, for example probably cannot be introduced fast enough (along with higher speeds).
In the meantime, there are some personal bugs I ran into. The last time my internet went down and took the phone system with it, the AT&T computer hung up on me 3 times before I got to a live operator. Then there is the fact that about a year or so ago, several old parts had to be replaced at the local junction to restore the service I purchased. So, from a personal viewpoint, there are some things that need to be “caught up”.
There is likely to be a change to wireless transmission in the future for just about everything relevant including the internet. That is very likely to require a capital investment. Admittedly, that is not the case now […]
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