In the grueling bear move during the fourth quarter, utility stocks have held up relatively well. After all, they generally provide for much more stability in their businesses, as well as higher levels of dividend payouts.
Yet, AT&T (NYSE:T) stock has not benefited from this. During the past three months, the shares are off 14%. In fact, the year-to-date return is -22%.
Even worse, T stock has lagged its main rival, Verizon (NYSE:VZ), which has returned 9% for 2018.
So, what’s going on here? Is AT&T stock at a good buy point right now?
Well, first of all, AT&T is in the midst of a major transformation — moving away from its core utility business. Of course, this has been the result of the $81 billion acquisition of Time Warner (the deal represents about 37% of the value of AT&T stock).
And, yes, getting the deal done has definitely been a challenge. The federal government waged a bruising antitrust case against the transaction. And even when this was defeated and the deal closed, the Justice Department appealed the decision! Although, it looks like the agency will again lose.
But I think the fight for Time Warner was worth it — and should be a positive for the AT&T stock price. Let’s face it, the mobile business is fairly mature in the US. So, with Time Warner’s media assets, there is the potential to generate more growth in the coming years.
Keep in mind that the entertainment assets are standout. They include marquee properties like the WB movie studios, HBO and Turner. Consider that the annual media revenues are roughly $31 billion.
AT&T’s massive mobile network should also provide nice distribution synergies. For example, the company has over 170 million D2C (direct-to-consumer) relationships. In the next few years, there should also be benefits from the move to 5G, which will mean richer media experiences on smartphones.
AT&T Stock and Streaming
Perhaps the most important catalyst for growth for AT&T stock is streaming. As seen with the success of Netflix (NASDAQ:NFLX), the business can be quite lucrative. There are ongoing recurring revenues as well as improving analytics on user behaviors, which can help make the service more personalized. Because of this, other mega-entertainment operators, like Disney (NYSE:DIS), are ramping their streaming efforts.
As for AT&T, the company plans to launch its service in the fourth quarter of 2019 and it will have three tiers: movies, original programming (such as with HBO) and the Warner and film library. AT&T has also named Kevin Reilly as the chief of this business. Prior to this, he led the turnaround of TNT and TBS. Oh, and when he was at NBC, he was critical in the development of breakout shows like The Office.
For now, the details of the streaming service are still sketchy. But AT&T does have the resources, assets and talent to put together a solid platform.
Bottom Line on AT&T Stock
AT&T definitely has its issues. Just look at the DirecTV business, which continues to shed subscribers because of the trend of cord-cutting.
However, it seems like much of the bad news is already baked into AT&T stock. Note that the forward price-to-earnings multiple is a dirt-cheap 8.
What’s more, the dividend yield is a juicy 7% — and the company has enough cash flows to cover it. For next year, the company projects that free cash flows will come to $26 billion and the dividend payouts will be about $15.6 billion. In other words, there is a good margin of safety.
So, investors will get a nice yield while they wait for initiatives like the streaming service to get traction.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
