According to analysts, AT&T (NYSE:T) stock should more than cover its dividend when the company next reports earnings Oct. 26.
The consensus among analysts is for 77 cents per share of earnings. The dividend costs 51 cents.
But in a world where the 30-year government bond yields 1.4%, AT&T stock is down 6.3% from its last earnings report on July 23. This despite a yield that now totals 7.16% per year. That’s higher than Chevron (NYSE:CVX).
How can this be? AT&T is the leading provider of mobile services, a business certain to take off with 5G. It is a major provider of wired broadband as well. Its press release on earnings claimed good things are coming from its entertainment unit, WarnerMedia.
What’s wrong?
The Debt
What’s wrong is the balance sheet, which showed over $175 billion of debt at the end of June. That’s a debt to equity ratio of .96. Forget the company’s market cap of $207 billion. Its “enterprise value,” the debt and equity combined, is almost $400 billion.
Most of the debt was bought to handle two miserable, terrible, horrible, and very bad deals by former CEO Randall Stephenson.
It spent $67 billion for DirecTV, a direct-satellite broadcaster, including its debt. It’s now worth much less.
Goldman Sachs was hired to examine DirecTV’s possible sale to private equity in May, and a sale to Dish Network (NASDAQ:DISH) is often teased. But nothing has happened yet. DirecTV has lost 7 million customers over the last two years and may bring much less than AT&T paid for it.
Then there’s WarnerMedia, for which Stephenson paid $85 billion in 2018. AT&T has been squeezing out costs ever since then, while rivals like Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) have increased budgets. Many of the Warner assets, like CNN, are built for cable TV, and AT&T lost 954,000 of these customers in the second quarter alone.
What Works
It’s clear that what Stephenson bought doesn’t work for T stock.
What does work is AT&T Wireless, which has been the company’s bedrock since its 1994 acquisition of McCaw Cellular for $12.4 billion.
Despite heavy advertising for 5G, AT&T has been squeezing costs here too. AT&T’s capital budget is about $20 billion, and that includes AT&T fiber deployments.
The AT&T capital budget is now lower than that for Amazon, which spent $24 billion over the last four quarters. Amazon is worth $1.58 trillion, or 7.6 AT&T’s. Even with AT&T’s debt added, Amazon is worth nearly four times more.
Why Buy AT&T?
There are reasons to buy AT&T, based largely on new CEO John Stankey undoing much of what Stephenson did.
Take a loss on DirecTV. Sell parts of WarnerMedia, like the movie studio, to Apple, Amazon, or Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google, even Facebook (NASDAQ:FB). Spin-off the cable networks like CNN, as a stand-alone company, to a cloud company or through private equity.
In other words, dump the garbage and focus on the network. There is enormous growth in 5G, for cars and the machine internet. Serving these last-mile networks are what’s working in the 2020 economy. AT&T shareholders should be benefiting from that change, which has years of runway ahead of it.
Instead, they’re stuck with debt and entertainment.
This is a situation that can’t continue. Cloud companies need more bandwidth to keep growing. They don’t need to see that bandwidth constricted because carriers are focused on TV, where bandwidth requirements are ultimately limited.
You buy AT&T today for the dividend, and you wait for the reorganization. The present company doesn’t work, but its pieces will work for someone. In 2023 AT&T will be a very different company. Take the yield in T stock and wait for the capital gains of a break-up that now looks inevitable.
On the date of publication, Dana Blankenhorn owned shares in AAPL and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn.