As the old disclaimer goes, past performance is no guarantee of future performance. But when it comes to AT&T Inc. (NYSE:T) stock, investors can’t ignore that past performance. AT&T stock has been a laggard for years now. Indeed, the multi-year performance of the T stock price is instructive:
- 1 year: -12.8%
- 3 years: +7.5%
- 5 years: -8.9%
- 10 years: -5.5%
AT&T shareholders have benefited from dividends. But even accounting for those distributions, T stock has returned barely as much as US Treasury bonds. And, obviously, AT&T stock has badly underperformed the stock market as a whole.
Any bull case for T has to be based on the idea that its performance should get better going forward. A 5.7% dividend yield does help. And there are a couple of reasons to believe AT&T stock might finally break out of its range — or at least get toward the top of it. But, as I’ve argued for some time now, there’s just not enough reason to believe that T stock is truly different — or different enough.
Will Good News Lead to a Higher T Stock Price?
There is a bit of drama surrounding AT&T stock at the moment. The U.S. Justice Department has sued to block the company’s proposed merger with Time Warner Inc (NYSE:TWX). That trial is underway, with its ultimate outcome still up in the air.
Elsewhere in the industry, the long-rumored merger between T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) may finally come to fruition, as rumors swirl about jump-started talks.
The news probably is positive for AT&T stock. The market didn’t love the Time Warner deal — the T stock price actually dropped on the news — but seems to have come around. TWX stock trades at a 7.3% discount to the current consideration offered ($104.25, based on a “collar” in the original deal). That would appear to suggest that investors are pricing in a reasonable chance of the deal going through, though the market may see TWX as still worth $90+ on its own.
And if the deal does break, AT&T wouldn’t take on the debt required, lowering risk on the stock somewhat. Whatever the trial’s outcome, it seems, at worst, something T stock can survive.
Meanwhile, the Sprint/T-Mobile merger would unquestionably be good news for AT&T. Three competitors is better than four, particularly in an industry best characterized as a “circular firing squad“.
And so, the case for AT&T stock at these levels is that good news could be on the way. Even if it’s not, at barely 10 times forward earnings, T stock looks cheap enough to buy.
Still Concerns Surrounding AT&T Stock
But there are a number of problems with the T bull case. The forward earnings multiple is cheap — but it’s actually roughly in line with that of Verizon Communications Inc. (NYSE:VZ). Clearly, investors aren’t terribly attracted by the US wireless industry, which is pretty much saturated at this point. And with AT&T likely to have over $150 billion in debt if the Time Warner deal goes through, there’s not a lot of room for error if margins and/or earnings start declining.
Barring a sea change, that’s still the most likely outcome. Wireless customers are expecting more from their providers — yet competition limits the ability to do much in regard to pricing. Longer-term, 5G could help; so could a Sprint/T-Mobile tie-up, if that ever happens. But at the end of the day, AT&T remains a capital-intensive, low-growth business. It’s not the kind of business that is going to drive big valuations — as T’s own trading history shows.
Time Warner doesn’t look like enough to change that, either. It’s not as if content-heavy businesses are soaring, or all that valuable. Even amidst a potential bidding war, Twenty-First Century Fox Inc (NASDAQ:FOX,FOXA) trades at 16x earnings. Walt Disney Co (NYSE:DIS) stock hasn’t moved in years. Comcast Corporation (NASDAQ:CMCSA), which owns and distributes content, is at a 52-week low.
This simply is a very tough industry. And there’s little reason to see AT&T as the best operator in that industry. The company steadily has lost market share to T-Mobile, and lags Verizon in wireless subscribers.
It’s simply not performing well enough. That’s why the T stock price hasn’t moved in a decade. And until that changes, AT&T stock isn’t going anywhere.
As of this writing, Vince Martin has no positions in any securities mentioned.
