In the near-term, AT&T (NYSE:T) stock is a pretty safe bet for income investors who want to buy the shares for its high dividend yield. Over the medium-to-long-term, however, the outlook of T stock is more uncertain, given the likely acceleration of cord-cutting.
AT&T’s fourth-quarter results, due to be reported on Jan. 29, almost definitely are not going to spark a rally. Its overall Q4 earnings will probably be similar to its Q3 report, which featured a 1.7% decline in revenue and a 1.4% decrease in operating income.
In Q3, the company’s wireless business delivered anemic results. Specifically, the revenue of its mobility business dropped slightly, as it lost a net total of 217,000 subscribers.
That was mostly offset, however, by a 0.6% increase in average revenue per user and a 227,000 gain in prepaid subscribers. Prepaid subscribers tend to be less lucrative than postpaid customers.
Lowered by cord-cutting, the revenue of the company’s Entertainment Group sank 3.4% YoY. The unit’s operating income fell 1.7% YoY, driven by video subscription cancellations. Finally, WarnerMedia’s top line declined 4.4% and its operating income dropped 1.7%, likely due to cord-cutting and the aging of two of the unit’s top shows, Big Bang Theory and Game of Thrones.
Q4 Was Probably Similar to Q3
In Q4, AT&T’s overall top and bottom lines probably declined slightly again. Video subscription cancellations likely accelerated slightly, with cord cutting’s popularity rising as more content became available on internet video.
However, due to the strong holiday season and the increased popularity of wearables, the growth of WarnerMedia’s ad revenue and wireless subscription revenue, respectively, likely accelerated.
Consequently, T stock probably won’t move much in the wake of the company’s Q4 results, as income investors will continue to hold onto the shares to benefit from its 5.4% dividend yield and other investors anticipate that the company’s results will be boosted later this year by the proliferation of 5G.
The Longer-Term Outlook
Over the longer term, the company has definite, strong negative catalysts and potential, powerful positive catalysts.
AT&T looks poised to be badly hurt as cord-cutting accelerates tremendously. As the phenomenon spreads to over 30% of Americans, the revenue and profits of Warner Media and the company’s TV services will tumble. Given the tremendous competition faced by AT&T’s internet TV offerings and their high costs, they’re unlikely to be significantly profitable anytime soon, if ever.
But the company has meaningful opportunities in 5G and broadband internet. Of course, phone upgrade rates will probably rise at least 20%-30% due to the spread of 5Gm, but wearables sales and upgrades could also surge. That’s because wearables will be a more convenient means than smartphones of exploiting the best attributes of 5G: enhanced location-based services and the ability to control other, connected devices.
Moreover, AT&T is looking to offer, “new capabilities to businesses and the customers they serve,” Barron’s reported.
The company appears to believe that it can earn money by selling WiFi to consumers in restaurants and retail locations., but it also thinks that businesses will be eager to get access to 5G because the technology will enhance their analytical capabilities. Further, consumers may want to add 5G to their homes so they can more effectively utilize many connected devices.
AT&T also recently built a significant fiber network, and it’s using that network, which serves more than 14 million locations, to sell broadband internet access to more consumers. Showing that demand for broadband is still growing rapidly, Comcast (NASDAQ:CMCSA) added 1.4 million broadband customers in the U.S. last quarter. That trend could accelerate further after the nationwide launch of 5G. (AT&T expects to launch 5G nationwide later this year.)
Still, it’s important for those who own AT&T stock or are considering buying it to remember that the company’s video business is currently much bigger than its broadband internet business. Specifically, its revenue from Warner Media and its TV subscription business came to a combined $15.7 billion in Q3, versus just $2.1 billion for its internet broadband business.
The Bottom Line on T Stock
For income investors, AT&T will likely work at least until the company reports its Q1 results in April. But at some point later this year, cord-cutting is likely to accelerate meaningfully, putting significant pressure on the shares. At that point, if 5G and the broadband business haven’t already proven to be powerful profit centers for the company, the stock will tumble.
Eventually, I think that 5G and broadband internet will overcome the likely decimation of the company’s TV businesses. But the ride to that destination will probably be quite turbulent.
As of this writing, the author did not own shares of any of the companies mentioned.
