Stock of the Week

AT&T

January 15th 2019

 

AT&T
NYSE Symbol: T
Industry: Telecom/media
Price as of 1/11: $30.87

 

2019 is off to a good start with the major averages up 3%. 2018 wasn't a bad year for most stocks and sectors until the last three months. The stocks and sectors that underperformed throughout 2018 actually held up well in the fourth quarter. With the turn of the calendar, money managers may continue to reallocate money to underperforming and beaten down stocks and sectors. This may be good news for value stocks and the International markets. If economic growth does slow in 2019, that could push even more money toward value stocks and high dividend paying stocks including this weeks' featured stock, A&T (T).

This is certainly not your grandparents AT&T. Ma Bell is now a diversified telecom and media company. Unfortunately, AT&T picked a bad time to diversify back in 2015 when they spent $48 billion to buy satellite cable company, DirectTV. Fast forward to 2018 and DirectTV lost 359,000 customers as the stock dropped nearly 20%. Sounds like a GE and Jeffrey Immelt deal.

But the more recent acquisition of the Time Warner cable and media businesses has performing much better. Right now, AT&T has the number one box office movie, Aquaman which passed the $1 billion mark this past weekend. AT&T can now boast the second-largest wireless network with a 100 million subscribers and the largest paid-television user base including names like HBO and the Turner Network which include TNT, TBS and CNN. AT&T will use these assets to bundle services to expand their cash flow.   

 AT&T is no longer a growth story, but a cash flow and dividend stock. This past week AT&T laid out its cash flow story for 2019. AT&T is expecting to generate $26 billion in free cash flow with approximately $12 billion remaining after dividends. This is good news because AT&T has a hefty debt load of over $100 billion. The company intends to use the $12 billion in free cash flow as well as $6 billion to $8 billion it expects to raise from asset monetization to reduce the debt. The company plans to lower its net-debt-to-adjusted EBITDA ratio to the 2.5x range by the end of 2019 and to continue deleveraging through 2022. The vast majority of AT&T's debt is fixed rate, protecting the company against interest rate increases.

If AT&T can get this debt burden under control and maintain or grow its cash flow, investors should warm up to the stock. With a 6.7% current yield and a track record of 35 consecutive years of raising that dividend, it won't take much price appreciation to create double digit returns for AT&T shareholders in the coming years.


 

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