AT&T Inc. (T) Stock Could Go the Comcast Way After Its Merger

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AT&T Inc. (NYSE:T) will close its purchase of Time Warner Inc (NYSE:TWX) shortly and, in so doing, become a bigger, more profitable clone of Comcast Corporation (NASDAQ:CMCSA).

T Stock: AT&T Inc. (T) Stock Could Go the Comcast Way After Its Merger

The combined entities delivered revenues of about $47 billion and profits of about $5 billion during the June quarter. Compare that with Comcast’s $21 billion in revenue and profits of $2.5 billion.

AT&T will run just as Comcast, keeping its hands off Time Warner’s entertainment and cable properties as Comcast stays away from NBC Universal. John Stankey will run Time Warner for AT&T much as Steve Burke runs NBC Universal for Comcast.

What’s Expected of T Stock

Time Warner is expected to deliver rocket fuel to AT&T stock, which has gone nowhere for five years while Comcast’s value is up nearly 130%. After all, CEO Randall Stephenson thinks, he has a better wireless franchise to sell it all through.

From the other side, the expectation is that Time Warner will be freed from intense worries about whether Wonder Woman or King Arthur won the box office, how many NBA playoff games there may have been and whether Trump likes MSNBC or CNN. It will be lost in the larger numbers of cable and wireless. Political pressure of all kinds will be reduced. Business will become more normal.

Our Richard Saintvilus is buying the argument. Wireless will pull the train, and Time Warner content will help pull it. The U-Verse cable operation will do better as part of a larger bundle, which could include discounts on wireless service, when it’s Time Warner content. He expects it to outperform the market over the next 12-18 months.

What’s Feared

Given that, why worry?

Start with over $40 billion in cash AT&T has promised to complete the deal. Some was already raised by June, but the rest is going to send AT&T’s total debt load north of $170 billion, when Time Warner’s is added, on total assets of about $490 billion. That could mean a debt downgrade by Moody’s and higher prices on said debt, in an environment of rising interest rates.

Fear dropped the stock 2% in one trading session recently — fear that the 49 cents per share dividend, now yielding over 5%, could come under threat.

It is a fear shared by Vince Martin, who sees margins under pressure with the new iPhone, further subscriber losses for U-Verse and DirecTV — which was acquired in 2015 — and only $60 billion in EBITDA to fund that $170 billion in debt.

My View Is Positive on AT&T

I disagree. Compare the new AT&T’s debt load to Comcast’s own — $57 billion in long term debt on $183 billion in assets. The difference is that Comcast pays out just $750 million annually in dividends, against over $3 billion for AT&T. Which only makes AT&T look better.

It will take time for AT&T to digest Time Warner, much as it took Comcast time to digest NBC Universal. Debt will have to be stretched over EBITDA, but the debt wheel turns slowly.

Even at 4%, debt service this year would be just $7.2 billion for the combined company, leaving plenty of money to clear the dividend and invest in 5G gear. Those expenses will not become a burden until 2019 anyway, by which time some might be paid off, refinanced, or perhaps spun out through an asset sale, as Verizon Communications Inc. (NASDAQ:VZ) has been doing with its local wireline units.

If you like income, in other words, AT&T should continue to deliver it. Time Warner content could reduce subscriber losses to T-Mobile US Inc (NASDAQ:TMUS), streaming bundles should add revenue cable is losing, and everything should balance out nicely.

While the current climate around the stock is fearful, income investors can get themselves a Ford Motor Company (NYSE:F) dividend at a relatively low risk. I’d call that a bargain.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/att-inc-t-stock-comcast-way/.

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