On the stock market, AT&T Inc. (NYSE:T) is revealing a “multiple top” at around $42 a share. This could suggest that T stock may fall in the near term. Sprint Corp (NYSE:S) and T-Mobile US, Inc. (NASDAQ:TMUS) already offer unlimited plans, but telecom giant Verizon Communications Inc. (NYSE:VZ) bringing back unlimited plans is scaring away AT&T shareholders.
But with a dividend yield of 4.7%, no more than one Federal Reserve rate hike in the quarter and investments in streaming, T stock looks compelling.
Time Warner a Growth Driver
In the fourth quarter, AT&T reported earnings of 66 cents a share on revenue of $41.8 billion. Though revenue missed consensus by $240 million and is flat year-over-year, the miss is minuscule. The real growth driver for the stock is AT&T’s acquisition of Time Warner, Inc. (NYSE:TWX).
Time Warner looks like a great addition in comparison to Verizon’s deal to buy Yahoo!, Inc. (NASDAQ:YHOO). TWX has solid content that will drive the combined company’s revenue higher. Yahoo has relevance as a search engine. It will likely lose much of its existing registrants after reporting the site was hacked at least twice.
Considering how TWX’s stock price is holding up, markets expect the merger will go through. T may offer concessions to the government. This includes promising not to withhold content from rivals. It also makes little business sense for the TWX unit to act in a monopolistic way. The entertainment industry thrives when content is distributed in as many ways and through the maximum possible number of partners.
T’s Debt Offering
To ready its balance sheet ahead of the deal, T filed a $10 billion debt offering on Feb. 2, 2017. The company said it will be “used for general corporate purposes, including the repayment of upcoming debt maturities.”
The maturity dates are as follows:
- S.$1,250,000,000 2.800% Global Notes due 2021
- S.$1,500,000,000 3.600% Global Notes due 2023
- S.$1,750,000,000 4.125% Global Notes due 2026
- S.$1,500,000,000 5.650% Global Notes due 2047
Note the debt maturities: AT&T has interest rate costs of just 2.8% that is not due until 2021. Even if the Fed raises rates, T will have secured favorably low rates.
T Brings Back Unlimited Data Plan
To match Verizon’s offering, AT&T is making the unlimited data plan available. From the press release, AT&T said:
“The new AT&T Unlimited Plan will include unlimited talk, text and data on 4 lines for $180.* Business customers can also take advantage of their additional corporate discount.”
This was previously available only in a DirectTV bundle. Markets fretted over the impending profit-margin erosion and need for higher capex to support the higher load on the networks. In reality, not all customers need an expensive, unlimited plan, regardless of the carrier offering it. The plan is an expensive luxury. Still, T-Mobile’s customer base grew partly due to plans like this.
Smartphone usage is holding steady. Growth slowed in recent years but the average consumer still must renew the phone plan regularly. So long as AT&T’s pricing and service quality are on par with competitors, it will not suffer a big drop in ARPU (average revenue per user) or total revenue.
AT&T is not trading at historically cheap levels, but it still pays a healthy dividend yield. The debt refinancing fixes future interest rate costs. Revenue will grow, thanks to the TWX merger and push for video content. For income investors, the stock is still attractive.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
