AT&T (NYSE:T) stock is a tough one to analyze. By all accounts, this century-old business has a solid track record and is an excellent defensive stock.
However, shares of the telecom and media giant have had a topsy-turvy 2020. After starting the year just below $40, T stock dipped to $26.77 in late March’s sell-off. It bounced back above $33 in the early summer. But then the stock slid to a 2020 low of $26.50 a pop on Oct. 28.
Why is this happening? According to AT&T CEO John Stankey, HBO Max closed the third quarter at 8.6 million active subscribers, bringing the total number of HBO and HBO Max subscribers in the U.S. to 38 million. That beats the company’s target of 37 million for the end of 2020 and 57 million globally.
Its dividend yield of 7.3% stands head and shoulders above the competition. And it continues to build out its 5G wireless network; it now offers access to 5G for consumers and businesses in a total of 327 markets in the U.S.
Despite all these positive developments, shares continue to lag the broader markets and their peers. Concerns regarding its highly leveraged balance sheet, dividend payout, and high investment costs serve as formidable headwinds. Adding new content to the HBO Max streaming service will also require a lot of capital.
However, I believe investors are overly harsh with this company. There are SPAC companies out there that are running on pure speculation.
But read on, and I will build a case why T stock is a can’t-miss opportunity for your portfolio.
HBO Max Is a Long-Term Tailwind for T Stock
Streaming is all the rage in 2020. Lockdown measures enforced due to the novel coronavirus pandemic brought about a huge surge in TV watching and online streaming.
Netflix (NASDAQ:NFLX) remains the top dog, with 195.15 million paid subscribers worldwide as of the third quarter of 2020. But companies like Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) are catching up with their respective services as well.
During the first few months of the pandemic, AT&T’s HBO Max entered the fray and has done quite well. AT&T received a lot of flak after the expensive acquisitions of DirecTV and Time Warner. The pandemic placed a lot of pressure due to cord-cutting bleeding off TV subscribers and movie theater closings hurting studio results.
HBO Max is the solution to these problems. At the end of the third quarter, total HBO Max subscribers in the U.S. came to 38 million and 57 million worldwide. However, it’s important to note that HBO Max activations to date are 12.7 million. That means about half of the existing HBO subscribers who could get HBO Max for free haven’t yet watched its content and may not be aware it’s available to them.
On a positive note, HBO Max finally arrived on the Roku (NASDAQ:ROKU) platform. One of HBO Max’s major initial criticisms was its unavailability on the largest streaming TV platforms. With Roku finally taking on HBO Max, subscribers will continue to grow at a healthy clip.
Meanwhile, other streaming platforms are raising their fees. Netflix raised its standard pricing from$13 per month to $14 in November. Disney’s bundle offering of Disney+ with Hulu and ESPN+ will also get a $1 hike from $13 to $14 per month. HBO Max is still expensive at $14.99 per month. However, with the recent competitive price hikes, the platform becomes very attractive.
Plus, no one could have anticipated WarnerMedia’s announcement that every single one of its movies in 2021 will release simultaneously in theaters and on HBO Max. The movies will stream on HBO Max for one month before leaving the platform for a period of time. We already saw the excitement Wonder Woman 1984 generated when it was released on the platform. And with a rich content slate in 2021 can give NFLX a run for its money.
Dividend Yield Is a Cut Above the Rest
AT&T has increased its dividend payout nine times over the past 10 years. However, we are unlikely to see a hike this year or the next due to the extenuating circumstances. The latest dividend announcements may peeve investors who are used to annual increases.
But the dividend yield remains the best among its peer group. The only one that comes close to its 7.2% yield is China Mobile (NYSE:CHL) with 7%. Plus, even though AT&T spends $14.82 billion on its quarterly dividends of 52 cents per share, dividend cover stands at 0.7x.
Once things start getting back to normal, dividend growth should resume. And as a stockholder, I would be happy to see the company deleverage and invest heavily in 5G and HBO Max for the time being. That will create long term shareholder wealth, something more valuable than a yearly dividend hike.
T Stock Is Attractively Valued
From a valuation perspective, AT&T is trading at decent multiples. Shares are trading at 9x forward price-earnings versus 47.2x for T-Mobile US (NASDAQ:TMUS). Meanwhile, T stock is 72.7% of its 52-week high while T-Mobile and Vodafone (OTCMKTS:VODPF) are 98.5% and 72.7%.
It seems strange that the company doesn’t register with investors as much as it should. However, that leaves room for you to invest in a stock on its way up, especially after Roku added HBO Max to the platform and its commitment to release all of its movies on the platform next year.
Excellent Opportunity to Invest in This Century-Old Business
It has taken a few years, but AT&T finally shaken the cobwebs and will enter 2021 all guns blazing. There were undoubtedly certain issues with this year’s HBO Max launch. But it looks like the company has ironed out the chinks. AT&T’s media strategy will center around the platform.
Even Morgan Stanley, which downgraded AT&T, acknowledged as much. “HBO Max may pay off in the long term, but from an AT&T [earnings per share] point of view, it will be some time before HBO Max is large enough to move the needle,” analysts Simon Flannery and Benjamin Swinburne wrote.
Since the closing of the Time Warner transaction, AT&T has made enormous progress in decreasing its debt load. That should help in quelling the concerns surrounding the company’s balance sheet.
The Bottom Line
T stock remains attractively valued as we ring in the new year. You don’t want to wait to add this one to your portfolio at a discount.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.