Skip to content

Is AT&T Worth Buying After Its Spinoff?

Is AT&T Worth Buying After Its Spinoff?

It’s been months in preparation, but a telecom company AT&T (T 0.71% ) The book finally closed on his entertainment business. The company has completed its subsidiary operations to combine its live broadcasting and entertainment assets with Discovery to form Warner Brothers Discovery.

AT&T has been a controversial stock over the past decade, underperforming after massive mergers burdened the company with debt. Now that AT&T has officially moved on, should investors return to the stock? Here is what you need to know.

What does AT&T look like now?

The “new” AT&T looks a lot like the “old” AT&T. The company goes back to its roots as a telecommunications company and focuses on what it knows best moving forward. Now that the spin-off is complete, AT&T is a stand-alone telecommunications company that will focus on its wireless business and opportunities in fixed wireless data networks and optical fibers.

A person using his smartphone in the city.

Image source: Getty Images.

The company’s balance sheet is also undergoing significant changes. AT&T’s balance sheet was arguably the biggest loser in its decade of pursuing the entertainment business. Before buying DirecTV in 2015, the company had about $80 billion in long-term debt. But the failure to generate enough profits to pay off the debt, plus the addition of Time Warner a few years later, left AT&T with $178 billion in debt today.

The subsidiary sent AT&T $40 billion in cash, which management will undoubtedly use to address its massive debt. Investors will get a fresh update on AT&T’s financial statements with first-quarter 2022 earnings, but shareholders can expect the company’s debt to start shrinking.

AT&T earnings have been the only bright spot for investors in recent years. Investors may not be thrilled to see management is effectively cutting dividends from an annual amount of $2.08 to $1.11 per share. However, this lowers the company’s dividend ratio to free up more liquidity to pay off potential debt, and investors still get a 5.6% dividend yield – not bad!

The way to grow forward

Of course, AT&T needs to grow to be more than just a high-yield, low-rise stock for your portfolio. AT&T has failed in entertainment, but it could be on to something with its new focus.

The management plans to invest heavily in the development of the optical fiber and fixed wireless network segments in the coming years. AT&T recently held an investor event in March. He highlighted the many emerging industries that will need data connectivity, including work from home, connected manufacturing, gaming, autonomous vehicles, and edge computing.

These industries can significantly increase network capacity demand, so AT&T wants to be able to handle that as these segments grow. The company’s wireline segment must gradually transition from moribund landlines to fixed optical and wireless over a period of several years. By 2025, the administration’s goal is for these new services to contribute 44% of EBITDA’s earnings from just 16% today.

Is AT&T buying now?

AT&T is trading at new lows after the show is finished, but remember that the assets have left the company. It will yield lower dividends in 2022, so the market re-prices the stock accordingly.

However, we can filter out the noise to see what the stock looks like from a valuation perspective. Management is targeting 2022 earnings per share of $2.42 to $2.46, down from 2021 earnings per share of $3.40, which explains the stock’s decline.

If you look at the P/E ratio of the stock using updated guidance, it is trading at a P/E ratio of 8. The stock has traded at an average P/E ratio of 17 over the past decade, even with DirecTV and Time’s headache Warner. The broader market should still reward AT&T with a better valuation, despite the potential for improvement in the balance sheet.

However, investors should not lose hope. I think AT&T is poised to be healthier in the long run, which could ultimately mean a higher stock valuation. It may take a while for the dust to settle and management put in a quarter or two of performance to give the market a sense of how things are going in the wake of the split show. If you believe in the AT&T transformation, stocks are still cheap and will pay you big dividends to wait for.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Source link