AT&T (NYSE:T) might have gotten what it wants after its $85.6 billion purchase of Time Warner was finally approved last month. However, its stock price wouldn’t have you thinking that’s the case. T stock is down 10% since June 12, when the decision was made, and was hitting new 52-week lows on Monday.
That’s got some investors confused and wondering whether T stock is a good investment after all. Given the size of the deal — and following not too long after AT&T acquired DirecTV for almost $50 billion — the company’s debt load has to be one issue.
These feelings of optimism following the Time Warner deal and feelings of dread following the stock’s reaction to the deal are all weighing on investors ahead of earnings. AT&T will report its second-quarter earnings results on Tuesday after the close. (It’s Worth pointing out is that Verizon Communications (NYSE:VZ) reports earnings on Tuesday before the open.)
T Stock Earnings
AT&T has not put together a very promising run when it comes to its quarterly results. Last quarter, revenue of $38.04 billion slipped 3.4% year over year (YoY) and missed estimates by more than $1.25 billion. Adding to the pain, AT&T came up short on earnings expectations as well.
It wasn’t just last quarter, though. The company has only beat or met revenue expectations twice in the last eight quarters — and three times in the last 13 quarters. It’s better on the bottom line, with AT&T beating or meeting expectations in six of the last eight quarters. However, four of those six times the company only met expectations, it did not exceed them.
In other words, earnings releases have not predominantly been a huge positive catalyst for AT&T. But this quarter could be different. Why? Because if management can put together a promising and reassuring discussion around the recent TWX deal, then perhaps investors will allow T stock a relief rally. In other words, they may be baking in the worst ahead of the results.
For the quarter, analysts expect sales to fall 110 basis points YoY to $39.39 billion. On the earnings front, estimates call for 85 cents per share. That’s down from 89 cents per share 30 days ago and 91 cents per share 90 days ago. In other words, expectations are falling ahead of the quarter, which is no surprise given the stock’s price action.
Trading T Stock
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There are two considerations when looking at T stock: the price and its dividend. Let’s work in that order.
On the chart above, you can see T stock is trapped in a descending channel (black lines). Channel support sits down near $30. This level should also serve as significant support, given that it was resistance from 2013 until 2016. While $31 has been recent support, it’s not significant.
If interest rates continue to drift higher, it will make high-yield stocks less attractive. That brings T stock’s dividend into the fold. Now yielding 6.45%, AT&T has the attention of a number of investors. Don’t forget, this is a dividend champion we’re talking about. AT&T has not only paid, but also raised, its dividend for 34 consecutive years.
If T stock falls to $30, it will yield almost 6.7%. Over the last 30 years, only twice has it yielded more than 6.9% — and those payouts never lasted. Given that T stock hasn’t cut its dividend, that means those short-lived high payouts were reduced by a rally in the stock price.
In other words, should shares fall another 3.2%, AT&T bulls may consider that yield close enough to support to warrant buying T stock.
The only problem? Earnings. A bad result will give conservative bulls exactly what they want — a low risk, high-yield entry to T stock. A good result, though, could lead to a relief rally.
What should you do? Aggressive bulls who want a piece of T stock could consider initiating a partial position ahead of the print.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no position in any of the aforementioned securities.
