AT&T Inc. (T) Stock Is Worth Another Look for the Long Game

With the TWX merger, T stock now has some growth potential

By Lawrence Meyers, InvestorPlace Contributor

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AT&T Inc. (NYSE:T) has a lot going for it, especially in current market conditions.

If I told you that inflation was closer to 10%, and nowhere near the 3% that you’ve been told, would you panic? Would you even believe me? Well, the bad news is that it is true.

The good news is that the Liberty Portfolio, my stock advisory newsletter, creates a long-term diversified portfolio that aims to be inflation with less risk than the market carries.

The other good news is that there are stocks like T stock that, between its generous dividend and growth possibilities, may be able to help keep your portfolio at pace with inflation.

AT&T was not on my radar as an obsolete telecom company, despite its solid dividend, until it purchased satellite-TV distributor DIRECTV. This was both necessary and essential for T stock. Sure, telecom bought in plenty of revenue, meaning cash flow, and therefore AT&T stock had a consistent dividend. But it lacked earnings growth.

DIRECTV was important for T stock because it was a natural tie-in in terms of bundling content distribution with telecom, and the ability for DIRECTV content to make the leap onto cellular phones outfitted with AT&T technology. Yet, the other angle for T stock with this merger was that content distribution is an oligopoly. American homes either have cable or satellite TV. That means regular, recurring revenue to receive that content on a monthly basis, which translates to even more cash flow.

DIRECTV also has so many different add-ons that upsells and more cash flow were made possible.

The natural move after this was to get into content production. Comcast Corporation (NASDAQ:CMCSA) had already purchased NBC-Universal. Enough years had passed for T stock management to see that this contributed to cash flow as well, so it bought up Time Warner Inc (NYSE:TWX).

And why not? AT&T already had the pieces in place for distribution, both via satellite, its U-verse cable product and over the phone. Time Warner has a ton of content that has been successfully been churned out for ages. This includes the premier pay-cable channel, Home Box Office. Not to mention a lock on tons of sports programming Turner Sports, PGA.comm Bleacher Report, NBA.com, NCAA.com, the big-money NBA League Pass (and NFL Sunday Ticket with DIRECTV), along with the big kahunas of Warner Brothers Studios, DC Comics, WB TV, and more than two dozen investments in strategically-positioned companies.

What’s important about Time Warner in particular is its reach. It isn’t a niche operator. It is truly mass media, and when you examine all the different content it controls, you realize it hits Americans of every stripe. With a broad demographic, that also is attractive to advertisers, who pony up good money for access, which means more revenue and cash flow.

The Bottom Line for T Stock

Now, with this huge vertically integrated conglomerate, T stock will benefit because consumers can mix and match their content. Telecom, cable/satellite, programming – all delivered how, where and when a consumer desires.   

Going forward, and especially thanks to the Time Warner merger, I’m changing my opinion from seeing T stock as just a trading stock. I think AT&T stock price should see reasonable capital gains going forward. First, it pays that 5.08% dividend, which is on the high end for most common equities. But I think 5% earnings growth is easily possible.

I don’t like that AT&T now has a mountain of debt that will never be paid off. However, debt service isn’t that expensive, and there is ample free cash flow available to pay that dividend. Also, while I think this sets up AT&T for the near future, at some point, growth is going to flag. The question then becomes: what next?

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned but has sold naked puts against TWX stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected]

 

 


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