Can Anything Derail the AT&T Freight Train?

Elliott Management will have a lot to say about how CEO Randall Stephenson proceeds

AT&T (NYSE:T) announces its third-quarter 2019 earnings on Oct. 28 before the markets open. T stock has been on a roll so far in 2019, up 41% year-to-date through Oct. 23, including dividends.

AT&T stock is a work in progress that still has credibility issues.
Source: Roman Tiraspolsky /

It appears that the latest AT&T earnings results will come and go with little fanfare or concern. Barring a complete surprise in a few days from its report, positive or negative, AT&T stock ought to maintain its momentum through the remainder of 2019 and into 2020.

Here are a few reasons why:

A Buyback Approaches

AT&T holds its annual investor day presentation the day after releasing its Q3 2019 results. Some analysts believe that it will announce a stock buyback then or as part of its earnings announcement.

It seems that analysts view a buyback as a nice reward for shareholders. After all, they’ve put up with Warner Media’s increased content spending for its new streaming service, HBO Now. Also, the content spend includes AT&T TV Now.

“The stock has rallied recently on deleveraging progress and lower interest rates, but still offers one of the highest yields in the market, with buybacks in prospect,” Morgan Stanley analyst Simon Flannery said in a recent note to clients.

Also, the company’s recent sale of wireless and wireline assets in Puerto Rico and the U.S. Virgin Islands to Liberty Latin America (NASDAQ:LILAK) for $1.95 billion will help it get closer to its 2019 goal of net debt 2.5-times adjusted EBITDA or less.

We’ve Got to Talk about the Debt

I’m not a fan of AT&T.

I was one of those doubting Thomases that thought it was a bad idea to be adding so much debt. This is especially so right now, when U.S. corporate debt levels are at record highs. Only low-interest rates have kept a lot of overleveraged companies, including AT&T, from running into financial difficulties.

At the beginning of 2019, I suggested that even if the company follows through with its debt repayment plans, its debt would still account for 70% of its market capitalization. Up significantly YTD, that number’s likely to be smaller by the time it reports its Q4 2019 results some time in early 2020.

In July, I argued that income investors interested in the 6% yield could do better. I recommended two different stocks that I thought were reasonable alternatives. Since then, BCE (NYSE:BCE) has done well while Kohl’s (NYSE:KSS) has gone sideways. However, both of these companies have far less leverage than AT&T, and that makes them worthy of your consideration.

The company’s goal in 2019 is to sell $11 billion worth of non-core assets to reach its debt reduction target. The sale of the Caribbean assets suggests it will indeed get to the self-imposed goal.

That’s excellent news.

When AT&T reports on Oct. 28, I will pay close attention to its debt reduction goals beyond 2019.

Elephant in the Room for T Stock

You would think that AT&T’s debt would be the elephant in the room, but it’s not.

No, the most significant subject facing CEO Randall Stephenson as it reports its Q3 earnings could be this: how the chief executive deals with activist investor Elliott Management, whose $3.2 billion stake ensures AT&T will be held responsible for its failure to deliver greater shareholder value.

Talks are said to be progressing between the two sides.

Elliott Management would like to see the company unload DirecTV, which it acquired for $49 billion in 2015. Stephenson doesn’t want to get rid of the satellite provider. Elliott would also like to see it cut $5 billion in annual expenses from its budget. Further, AT&T should withhold from making any further acquisitions until Warner Media is adequately digested.

Come earnings and its investor day, AT&T better have an agreement in place with Elliott Management. Or, T stock will lose all gains from 2019 and head back into the mid to low $30s.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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