Telecommunications and media giant AT&T Inc’s (T) third-quarter performance was better than expected. However, investor distrust regarding the planned divestitures, upcoming dividend cut, and uncertainty regarding recent strategic shifts, outweighed the strong results. This led to a decline in the stock price following the release of quarterly earnings.
Despite the negative sentiment in the market, AT&T seems to be headed in the right direction to create value for long-term-oriented shareholders. I am bullish on the prospects for AT&T as I believe the dividend cut and the planned divestitures will boost the operating efficiency of the company. (See Analysts’ Top Stocks on TipRanks)
Moving in the Right Direction
AT&T is currently focused on three main business areas. First, retaining its market position as a leading broadband services provider and monetize its fiber footprint. Second, positioning HBO Max as one of the fastest-growing streaming services in the United States. Third, growing its wireless subscriber base by providing top-notch service to its existing and potential customers.
In the last few quarters, the company has made noteworthy progress from all of these fronts. This is an encouraging sign as AT&T’s previous strategy of expanding its scale at any cost led to a massive build-up of debt, and focusing on many uncorrelated business areas resulted in a more cyclical business profile than its pure-play telecommunication peers.
In the first half of this year, AT&T reported stellar broadband subscriber growth, and more importantly, earnings moved in the right direction.
The company carried this momentum into the third quarter as well. The company’s third-quarter revenue was down 5.7% from $42.3 billion a year earlier to $39.9 billion, missing the analyst consensus by $224.7 million. Reported revenue included a net $1.8 billion of revenue tied to DirecTV and the company’s video operations that were eventually spun off in early August.
AT&T’s adjusted EBITDA was $12.6 billion for the quarter, up 2.9% year-over-year excluding the separated TV operations while the net income came in at $5.9 billion against analyst expectations for $4.5 billion in earnings. The company registered year-over-year earnings growth of 110% for the third quarter, which highlights the strong momentum behind the company’s business at the moment.
AT&T added 928,000 net new postpaid subscribers and an impressive 249,000 prepaid subscribers in the third quarter, well ahead of analyst expectations.
AT&T and its peers have been active with promotional efforts in recent months, resulting in robust postpaid subscriber additions. The company offered subsidies of up to $1,000 for new and existing customers who purchased the latest iPhone 13 devices with an AT&T contract. This proved to be a very successful campaign for the telecommunications giant.
Spin-Off of Entertainment Assets and Dividend Cut
WarnerMedia, owned by AT&T, is home to one of the largest TV and film studios in the world, along with a deep library of content. This includes HBO Max, which was launched in several international markets recently, with 10,000+ hours of curated, premium content.
Last May, AT&T surprised investors with its announcement of spinning off the WarnerMedia subsidiary to Discovery, Inc. (DISCA) by mid-2022. AT&T shareholders will own 71% of the new company once this deal is completed.
The soon-to-be separated segment brought in $28.2 billion in revenue in the last quarter and $11.2 billion in EBITDA. This deal will help AT&T return to its telecom-only roots, and with that, the company will be more focused on competing in the U.S. wireless and home broadband markets.
Along with this transaction, AT&T plans to maintain an annual dividend payout of 40-43% on expected cash flows from the remaining business. This suggests that a 50% reduction of the current dividend is on the cards by mid-2022.
Although this is not encouraging news for income investors, this planned dividend cut will help the company focus more on reducing its debt burden while funding investments with internally generated cash, both of which are positive outcomes for long-term investors.
Wall Street’s Take
Turning to Wall Street, T has a Hold consensus rating based on three Buys, five Holds, and one Sell rating assigned in the past three months. At $30.75, the average AT&T price target implies 23.9% upside potential.
AT&T investors should ideally prepare themselves for some volatility as the planned dividend cut is fast approaching. The company seems to be moving in the right direction by focusing on business areas where competitive advantages can be achieved, but it would take a few quarters for this positive impact to be reflected in the financial performance of the company.
Disclosure: At the time of publication, Dilantha De Silva did not own any shares mentioned in this article.
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