In Retrospect: AT&T

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I look back at our purchase of AT&T.

AT&T_pic

On October 13, 2017 we bought 135 shares of AT&T. At a price of €29.93 we paid €4,040.55 plus €10.10 in order fees.

What is AT&T?

AT&T is the largest telecommunications company in the world. The history of the North American telecommunications giant can be traced back to the late 19th century, when Alexander Graham Bell – the inventor of the modern phone – founded the company in 1885.

Today, AT&T is based in Dallas, Texas, and operates mainly in North America. The company is divided into 5 operating segments:

  • Consumer Mobility (nationwide wireless service)
  • Entertainment Group (video, internet, voice communication, and interactive and targeted advertising services)
  • Business Solutions (communications services to business customers)
  • WarnerMedia (media content)
  • International (wireless and video entertainment services in Latin America)
AT&T Revenues 2017 in bn US$
AT&T Revenues 2017 in bn US$

For decades the telecommunications sector has been in constant change. Whereas in the early days, telecom companies just had to keep an eye on their landlines, they now must maintain several networks at the same time (telephone, cable, mobile, etc.).

Not so long ago, AT&T expanded its own customer base even further by purchasing US broadcast satellite provider DirecTV for $67 billion. However, this move likely came at the wrong time, as more and more DirecTV customers are now switching to streaming providers such as Netflix, which offer their services significantly cheaper.

Of course, AT&T doesn’t stand idly by. The company plans to evolve from a pure telecommunications company into a media powerhouse. That’s why it fought for almost 2 years to get the permission to acquire US media conglomerate Time Warner (today: WarnerMedia). The purchase price of $85 billion increased AT&T’s corporate debt level to unknown heights. However, the company is now also in charge of content providers like HBO (Game of Thrones), Warner Bros. (Harry Potter), DC Comics (Batman), The CW (Supernatural), CNN (News) and many more, which might be a huge competitive advantage in the future.

Why AT&T?

When we decided to buy AT&T shares in October 2017, it wasn’t yet clear if the Time Warner takeover would be permitted by the regulatory bodies. That uncertainty brought AT&T’s share price down to a 2-year low.

Whereas the slump seemed justified given the initiation of antitrust proceedings by the US Department of Justice, AT&T’s dividend yield also rose to 6%. Of course, nobody knows for certain for how long AT&T would have been able to maintain such a high payout without a successful takeover of Time Warner. However, the company had increased its dividend for 33 years. And just like with Shell, it was precisely AT&T’s dividend history which gave us enough confidence to initiate a position, although court still had to decide whether to permit the takeover bid.

How did our investment in AT&T turn out?

Although the stock appeared to be relatively cheap at the end of 2017, AT&T’s share price has declined even further since then.

Given the ongoing transformation and the mountain of debt resulting from the aforementioned acquisitions, AT&T’s shares price fall from €29.93 to €25.79. That’s a 13.8% discount compared to our purchase price. However, the share price is back at €27.80 now, which is only a 7.1% decline. In addition, we already earned almost €170 in dividend income.

Chart AT&T
Chart AT&T

Is AT&T’s stock still worth buying?

But should you still buy AT&T’s stock today? That I want to show you based on our stock screener. So, let’s go!

How cheap is AT&T?

I think a company’s stock is cheap if its current price-earnings ratio (PER) is lower than its average PER (since 2004). In case of AT&T, current PER is sitting at 10.9. This is less than its long-term average PER of 14.9.

AT&T Factor 1
AT&T Factor 1

Therefore, AT&T’s shares are currently significantly cheaper than usual. I grant 10.9 bonus points.

How strong is AT&T?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of AT&T, the lower of the two growth rates is 2.3% p.a. The company’s medium and long-term earnings growth is positive.

AT&T Factor 2
AT&T Factor 2

Therefore, AT&T seems to be a fairly strong company. I grant another 2.3 bonus points.

How robust is AT&T?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of AT&T, the maximum year-on-year drop in profits was 100% (FY2008). The company reported such a loss once over the entire valuation period.

AT&T Factor 3
AT&T Factor 3

Therefore, AT&T does not seem like a robust company. I grant 33.3 minus points.

Is AT&T currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of AT&T, due to its robustness I would allow a PER of 8.0. This is less than its current PER (10.9).

AT&T Factor 4
AT&T Factor 4

Therefore, AT&T’s stock seems to be no real bargain now. I grant another 15.5 minus points.

Jung in Rente Score

The result of our stock screener – the so-called “Jung in Rente” score (JiR score) – is simply the sum of a company’s bonus and minus points. In case of AT&T, that leads to a JiR score of 35.6 minus points.

AT&T Jung in Rente score
AT&T Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

With a JiR score of -35.6, AT&T is currently not recommended for further purchases.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

AT&T Dividends
AT&T Dividends

Up until now, AT&T pursued an extremely investor-friendly dividend policy. The US-American company has increased its dividend year after year over the entire valuation period. In fact, the positive dividend history dates back as far as 1984. At present, AT&T pays out about 67% of its earnings, which is equal to a dividend yield of 6.3%.

Conclusion

Due to its high dividend yield as well as its impressive dividend history, we added AT&T to our portfolio at a price of €29.93 per share at the end of 2017.

As it turned out, we should have waited just a little longer. Despite the successful acquisition of Time Warner, the share price dropped to a 4-year low (€26), which is probably due to the massive increase in debt.

However, I don’t think that AT&T is facing an impossible task. The company is obviously going to need a little while until it has reduced its accumulated debt. Nevertheless, the acquisition of Time Warner represents a highly promising approach to achieve an unprecedented vertical integration in the US telecommunications and media sector. AT&T’s competitive position could definitely be worse.

For this reason, we continue to believe in AT&T and stick to the company despite the previous price drop. Should the share price see a significant decline, I would even consider adding to our existing position.

What do you think about investments in the telecom sector and AT&T in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

2 Replies to “In Retrospect: AT&T”

  1. Hi David
    There is a lot to like about the telecom sector and AT & T in particular. It has a unique, almost monopolistic position, is quite diversified and I’d agree, the takeover of Time Warner should strengthen the underlying business even further. The yield is attractive as well and I’d expect that AT & T will increase the payout modestly over the next years.
    On the other side, as you mentioned, there is that massive debt load. I’ve to say that I cannot think of any other company carrying so much debt. .. well, maybe AB Inv, but that’s a different business, beer companies are less capital intense. Companies in the telecom sector require incredible amounts of investments just to keep their earning power. It’s hard to grow in a very capital intense, transforming sector with very little pricing power. There really is a cut throat competition.
    But you pulled the trigger at a nice price and in my view AT & T is a very attractive stock to reinvest the dividends. I’d not be surprised to see the stock price rather flat resp. slightly falling over time, as the company has to deleverage and not too much room for dividend increases or bolt on acquisitions. ATT & T has to digest that huge acquisition.
    Perfect conditions to increase the stock count over time.
    Cheers

    1. Hi FS,

      I totally agree with you. I don’t expect any large stock price or dividend increase (any time soon). However, the reason to initiate a position in AT&T resembles the rationale behind our purchase of Royal Dutch Shell. Because even if there is no capital appreciation, it would be more than enough, if the company is just able to maintain the current dividend level. The anticipated positive effects of the Time Warner takeover would therefore only be the cherry on the cake!

      – David

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