Should I Buy AT&T Inc. (T) Stock? 3 Pros, 3 Cons

Advertisement

AT&T Inc. (NYSE:T) may be over 130 years old, but this does not mean it is slow. After all, the company has continued to be aggressive with M&A, with the latest deal being the $85 billion proposed acquisition of Time Warner Inc (NYSE:TWX). But AT&T has also been busy with its own R&D, as seen with its recent streaming video offering.

Should I Buy AT&T Inc. (T) Stock? 3 Pros, 3 Cons

And yes, the company has also proven to be a nice gainer for investors. For the year so far, AT&T stock has logged a return of 17%. To put this performance in perspective, Facebook Inc (NASDAQ:FB) has gained about 14% for 2016 and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is at about 3%. Then again, there is definitely a big help from the juicy AT&T dividend of 4.9%.

OK, then what about the future? Will AT&T stock be able to keep up the returns for investors? Or should there be some caution now?

Well, to see, let’s take a look at the pros and cons:

Three Pros to Owning AT&T stock

A Communications Powerhouse: At the core of AT&T is its massive 100% fiber network, which delivers wireless and TV services across the US. This is a huge strategic asset, since it would take huge amounts of capital to replicate. As a result, AT&T has a stable source of recurring revenues from both consumers and businesses.

Here is run-down on the scale of the business:

  • 79.4 million business wireless subscribers
  • 53.9 million consumer wireless subscribers
  • 25.3 million video subscribers

But AT&T also continues to invest heavily in new innovations and technologies. Consider that the company holds over 12,500 patents.

Leveraging The Platform: Over the years, AT&T has been savvy with M&A and partnerships to expand its business into new growth areas. Perhaps the most notable example of this is the $50 billion acquisition of DirecTV. The deal has not only resulted in a nice jump in the paid subscriber base but is making it possible to get a much bigger piece of the video opportunity.

To this end, T has launched its streaming offering — for the internet, mobile, Apple Inc. (NASDAQ:AAPL) TV and Amazon.com, Inc.’s (NASDAQ:AMZN) Fire TV — called DirecTV Now. It has over 100 TV channels from premium content providers like Walt Disney Co (NYSE:DIS) and TWX. The service is also quite affordable, with plans starting at only $35 a month.

But AT&T is also making interesting moves with the enterprise market, such as with services like cloud access, networking, security and IoT (Internet-of-Things). For example, the company recently signed a major deal with the Amazon Web Services.

Financials & Dividend: For the most part, AT&T has been fairly consistent, with moderate growth and strong cash flows. In the latest quarter, revenues increased by 4.6% to $40.9 billion and net income came to $3.3 billion or 54 cents on T stock, up from $3 billion or 50 cents a share in the same period a year ago. Cash flows have also remained impressive. In Q3, they were a hefty $11 billion.

All this should provide comfort with the sustainability of the AT&T dividend. In fact, the company has increased its dividend for 33 consecutive years. As for the latest move, it came last quarter, which involved a 2.1% increase.

Three Cons to Owning T stock

Complexity: Aggressive M&A poses lots of risks. There may be bad timing, overpayment and issues with cultural integration. There are also just the ongoing complexities of managing diverse businesses.

Granted, AT&T has been very disciplined with its dealmaking. But even the best managements can make huge blunders.

In other words, there should definitely be some anxiety with the deal between AT&T and TWX. Both are in different industries — one is about networks and subscribers and the other is focused on the dicey business of producing compelling content. So could there be a clash of the two organizations? Might the content creators feel they do not have enough freedom? Or what if TWX hits a dry spell?

All these things could weigh on AT&T stock. And when it comes to troublesome deals, one of the common themes arises when there are disparate business. Ironically enough, this was a key issue with notorious merger of TWX and AOL back in 2000. The result was a whopping $99 billion writeoff within about two years!

Debt: It’s currently at about $120 billion. But with the TWX merger, it will likely reach a nose-bleed $170 billion. This would come to about 68% of the market cap.

Now debt is not necessarily a bad thing. Besides, AT&T has the big advantage of massive recurring revenues.

Yet if the TWX deal goes sour and cash flows contract, the debt load could become a problem. It’s also important to note that the U.S. has not had a recession since the financial crisis of 2008. So it does seem reasonable that there will be slowdown at some point, perhaps within the next few year years.

Already the debt agencies are getting antsy. This is what Moody’s recently noted about the potential impact of the TWX acquisition:

“AT&T’s funded debt balance could exceed $170 billion following the transaction close and average annual maturities will be greater than $9 billion starting in 2018…This may cause AT&T’s cost of debt to rise, especially in times of market stress. Rising benchmark rates, combined with wider credit spreads would put pressure on AT&T’s free cash flow.”

Competition: While the mobile business is a rich source of revenues, there are still major issues. The market is fairly mature and commoditized. Oh, and of course, there are perennial price wars, which increase churn.

AT&T has tried to avoid engaging in aggressive promotions. But this has led to softness in subscriber numbers. In the latest quarter, AT&T shed 268,000 mainstream wireless phone customers. These tend to be the most valuable because they generally remain subscribers longer.

No doubt, AT&T has the advantage of a diverse set of businesses. But if the subscriber losses continue, there will likely be more pressure to get promotional, which will lead to weakening revenues and cash flows.

Buy or Sell AT&T Stock?

The risks for T stock are concerning. Perhaps the most important is the TWX deal. But then again, in order for AT&T to continue to grow, there needs to be calculated bets — and transformative moves, right?

I think so. What’s more, the good news is that the company has had a long history of making fairly good strategic decisions. It is also encouraging that AT&T knows how to leverage its acquisitions, as seen with the new streaming video service. And yes, the company has the advantage of massive recurring revenues from its mobile and TV businesses.

So for investors looking for an attractive dividend play with moderate growth potential, the pros on AT&T stock outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own tax preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/buy-att-inc-t-stock-pros-cons/.

©2024 InvestorPlace Media, LLC