Time Warner Inc (NYSE:TWX) may be on its way out of existence, yet the company has never looked better. The company just beat earnings and is showing strong revenue and profit growth amid uncertainty revolving around its takeover by AT&T Inc. (NYSE:T).
And as followers of the proposed merger know, holders of TWX stock will receive a premium if and when the government approves the deal. With high earnings growth and the strong possibility of receiving that premium from AT&T, holders of Time Warner stock find themselves in a win-win situation with regards to the proposed merger.
TWX Stock Handily Beat Earnings, Revenue Estimates
In what could be the last earnings release as a standalone company, TWX handily beat earnings per share (EPS) estimates, earning $1.60 per share for 4Q 2017. Analysts had expected $1.44 per share.
Revenue came in at $8.6 billion, exceeding estimates of $8.34 billion. This number also represents a year-over-year increase of 9% from the 4th quarter of 2016. The company credits its movie Justice League and the HBO series Game of Thrones with the improved numbers.
Most of the focus on Time Warner relates to the proposed merger with AT&T. Both companies announced the merger in October 2016 with a one-year timeline originally set. With that deadline missed, AT&T now says the agreement extends for a “short period of time.” However, TWX stock received an upgrade to a buy from MoffettNathanson. They estimate the probability of merger completion at 90% despite the delays.
Owners of TWX Stock Win No Matter What
Still, one might ask, “why buy TWX stock when they’re about to be absorbed into AT&T?” The short answer is TWX stockholders come out ahead in either scenario.
First, TWX remains a buy even if the Department of Justice (DOJ) blocks the merger. TWX still has a viable internet business which will mitigate the losses from the cable cutting. It also owns Turner Broadcasting, HBO and Warner Bros. Its peers Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOXA) (who plan to merge) remain competitors to their content library. Nonetheless, only Comcast Corporation (NASDAQ:CMCSA) and Disney constitute larger media empires.
Also, the $1.60 per share in quarterly profits show a large increase from the same quarter in 2016 when the company earned $1.25 per share. As mentioned earlier, revenues also rose by 9%, so TWX stock remains a compelling growth story.
Dividend growth has also remained steady. After years of dividend increases, the company held its payout level stable at an annual dividend of $1.61 per share. That constitutes a 1.7% yield, near that of the S&P 500 average.
If the merger goes through, the agreement gives holders of TWX stock $107.50 per share. The stock trades around $97 per share currently. From this price level, that brings the TWX stock price up by 11% instantly. Also, dividends yields will dramatically improve. AT&T pays an annual dividend of $2 on a much lower share price, giving investors a dividend yield of 5%.
Concluding Thoughts on TWX stock
Amid what could be its last earnings report, buying TWX stock remains a win-win for investors.
The company handily beat earnings, giving the company a substantial increase in EPS from the same quarter in 2016. Revenues also increased by 9%. These numbers show that even if the DOJ blocks the takeover by AT&T, TWX stock remains a great standalone investment. Still, merging with AT&T makes the combined company a formidable communications and media empire.
Plus, in that case, holders of TWX stock receive a premium over the current stock price and triple the dividend yield. With a purchase of TWX stock, investors benefit from the kind of uncertainty that normally rattles stock investors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
