On July 24, AT&T (NYSE:T), the Dallas-based multinational conglomerate, released Q2 earnings, which the markets overall found solid. Year-to-date, AT&T stock is up over 18%, reflecting growing investor confidence in the business.
Although I believe AT&T belongs in a long-term income-generating portfolio, I expect market volatility to continue in the rest of August. Therefore, the stock price is likely to be choppy, too. The shares up about 10% since early June.
Any profit-taking in the coming weeks would be a sign to investors to consider buying into T stock. Let’s now take a deeper look into what makes AT&T stock a good long-term investment.
AT&T Stock’s Q2 Earnings
With a market capitalization of $246 billion, AT&T presented Q2 revenue in four main segments:
- Communications (includes Mobility, Entertainment Group, and Business Wireline)
- Warner Media (includes HBO, Turner and Warner Bros.)
- Latin America (includes Mexico and Vrio)
- Xandr (handles all advertising business)
AT&T’s earnings per share of 89 cents and revenue of $45 billion met analyst expectations. AT&T reported $44.96 billion in total revenue for Q2 — slightly beating Wall Street expectations of $44.85 billion.
Communications revenue, which came at $35.5 billion, was up 0.3% year-over-year (YoY). The increase reflected gains in Mobility that were partially offset by declines in Entertainment Group and Business Wireline.
AT&T’s domestic wireless business is currently neck and neck with Verizon Communications (NYSE:VZ) for market share. Mobility is by far the most important business for AT&T, leading to $17.5 billion revenue, up 1.3% YoY.
Warner Media, the fastest-growing division in the second quarter of 2019, reported revenue of $8.4 billion in the quarter, up 5.5% year over year.
During the conference call, CEO Randall Stephenson sounded optimistic when he said: “We’re halfway through the year and on track to deliver on all our 2019 priorities.”
However, AT&T’s pay-TV business, DirectTV and DirecTV Now, posted net subscriber losses of 778,000 and 168,000, respectively. The company put the blame on price hikes and fewer promotions. This decline has been going on for several quarters. On July 30, management announced that DirecTV Now would become “AT&T TV Now” later this summer.
AT&T Is Now a Content King
In June 2018, a federal court had approved the merger of AT&T’s $85 billion acquisition of Time Warner — a deal that has turned T stock a media giant and “content king.”
HBO is one of Time Warner’s assets that AT&T shareholders now own, too. This entertainment network has an enviable library of many shows that generate consistent revenues. The final season of Game of Thrones has, for example, attracted record audiences for HBO. During the quarter, HBO grew to $1.7 billion in revenue, up 2.9% YoY.
In spring 2020, AT&T will launch HBO Max. This direct-to-consumer streaming service will include HBO programming, licensed content like “Friends,” Warner Bros. movies, and original movies and series.
The group is also working on other offers so that AT&T customers can access this content on their mobile phones. In other words, with Time Warner, AT&T can now offer services similar to those offered by the competitors, including Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Walt Disney (NYSE:DIS).
AT&T Is Paying off Debt
Most long-term investors do not want to be constantly thinking about the fundamental strength of the stocks in their portfolios. AT&T’s balance sheet has been improving in recent quarters — another reason why I am interested in T shares long-term.
The improving fundamentals are partly why AT&T stock price has gone up in recent months and after the quarterly report. Over the past few quarters, AT&T’s debt load has been on Wall Street’s radar. The company finished 2018 with a debt load of $171 billion. The group has recently reaffirmed the commitment to reduce that debt to $150 billion by the end of 2019.
Acquiring Time Warner has bloated this debt load. However, the communications giant is now working to cut costs and the debt at the same time. For example, it has recently sold its minority stake in Hulu, a premium streaming service, to its other owners Walt Disney and Comcast (NASDAQ:CMCSA), for almost $1.5 billion.
As of June 30, AT&T had $157.9 billion in long-term debt. The company said it reduced net debt by $6.8 billion in Q2 and by $18 billion in the last 12 months.
Management is well aware of the importance of decreasing the level of debt sooner than later so that the company can regain investor confidence. The debt maturity schedule is quite spread out over the next few decades. Therefore, I am still comfortable with this amount on the books.
T Stock’s Free Cash Flow and Dividends
In a low-interest-rate environment, stock investors pay special attention to shares with robust dividend yields. Dividend stocks help investors generate a regular passive income.
In general, big blue-chip names tend to be consistently generous dividend payers. And telecommunications companies have traditionally been regarded as relatively safe dividend investments. Experienced dividend investors also pay close attention to a company’s free cash flow as dividends are ultimately paid out of cash.
Free cash flow is what remains in the bank after AT&T has paid interest on its debt, paid any taxes owed, and made all of the capital expenditures necessary to run and invest in the giant business. AT&T is a large business that generates a lot of cash.
In Q2 AT&T’s free cash flow stands at $8.8 billion, a YoY increase of $3.7 billion. AT&T has now increased its FY 2019 free cash flow guidance to $28 billion. This amount is money left over from operations; in other words, it is not needed to run the business.
AT&T may possibly use part of this amount to reduce its debts. Lower debt levels may, in turn, enable the company to support a higher valuation and price level as well as increase its dividends.
AT&T stock also offers a strong dividend yield at over 6%, which is a big attraction for many long-term investors seeking strong stocks to buy for 2019 and beyond.
Finally, over the past 35 years, AT&T has a history of increasing dividends annually. This is yet another important reason why I believe it belongs in a capital-growth portfolio. As long as investors still believe in AT&T’s prospects, the hefty dividend yield keeps them from panicking and selling the shares. AT&T stock is expected to ex-dividend in early October.
Should Investors Buy AT&T Stock in August?
AT&T has an impressive portfolio and a diversified revenue stream. As we finish the summer and earnings season, many stocks may continue to be volatile in August, and I would not advocate trying to identify stocks that could be immune to a U.S.-China trade war.
If you are an investor who also follows technical charts, then you may want to know that over the past few weeks, the short-term technical chart is pointing to a potential profit-taking.
Recently, AT&T has hit resistance between $34 and $34.62, the 52-week high reached on July 30. Therefore in the coming weeks, I expect AT&T shares to trade between $32 and $34.
If you aren’t already long T stock, you may want to remain on the sidelines until we have more clarity on the current trade war rhetoric.
If you are already own AT&T shares, you may also consider initiating covered call positions in conjunction with being long T stock. For example, Sep. 20 expiry at-the-money (ATM) covered calls may enable you to hedge your long position in case of further profit-taking amidst the current volatility. You would also be able to participate in a further up move in AT&T stock price.
In short, despite any potential short-term price weakness, T stock belongs to a diversified portfolio. Amid all the recent market volatility, I regard AT&T as one of the key telecom and media stocks to buy for value and stability.
As of this writing, Tezcan Gecgil holds T and VZ covered calls (August 9 expiry).