AT&T (NYSE:T) continues to flounder. T stock is down over the past three months, six months, and year. In fact, AT&T shares are not far above their 10-year lows. The 2010s were a lost decade for the firm, and the 2020s are off to no better of a start.
The company made a number of ambitious but ultimately misguided acquisitions. This caused it to become the world’s most indebted company at one point. The purchases didn’t generate enough cash flow to make the math work. Ultimately, AT&T had to divest many of its holdings and shrink back to its core telephony business.
Some investors have gotten excited as this repositioning is almost complete. The firm plans to divest its media holdings via a merger/spin-off with Discovery (NASDAQ:DISCA) over the next year. After that, in theory, AT&T can finally return to prosperity. However, it may not be quite that easy.
A Tough Situation For T Stock
AT&T as a company is caught in an incredibly difficult situation right now. It needs to convince investors that its new corporate direction will get the company back on the right track. However, investors looking at it see the company’s prominent failures such as the AT&T Mexico investment, DirecTV, and most painfully, Time Warner.
That last one, in particular, was such an expensive overreach that it forced the company to slash its once-sacred dividend. A huge portion of the T stock shareholder base was there for that 6-7% annual dividend. With the dividend cut down to a more manageable level, it no longer stands out against other telecom peers. An investor can easily buy Verizon (NYSE:VZ), for example, and get a fine dividend without nearly as much unwelcome corporate drama.
AT&T’s situation should improve once the media business spin-out is complete. At that point, the company will get to present its new face to the public. With less debt and a fresh earnings outlook, AT&T can finally start to chart a new course. For now, however, it’s stuck in purgatory as it waits until it can finally jettison Time Warner and begin again.
Contrarian, Or Just Wrong?
Oftentimes, you can get a great buy picking up a stock when it is broadly out-of-favor. And that certainly applies to T stock right now. You’d have to be a real contrarian to get fired up about AT&T at the moment.
Even for pure value investors looking for a turnaround, however, it’s far from clear that AT&T is the best prospect. Sure, the upcoming spin-off will get rid of a lot of debt.
More broadly, it’s becoming a question just how good the telecom businesses are. Yes, they have highly stable operating cash flows. However, the constant upgrade cycles for 3G, 4G, and now 5G have sapped a ton of capital out of these firms.
There’s a reason that the telecom and cable operators are some of the most indebted companies on the planet. In the old days, AT&T could set up a telephone line and collect revenues off it for decades. Now, having to splash billions around for each new mobile internet upgrade cycle has weakened long-term profitability. We’ve seen this same effect in overseas telecom operators, such as in Europe, which have produced consistently disappointing results in recent years.
Attempting a Turnaround in Challenging Conditions
That’s not to say the industry is not investable by any means. But as it has become more competitive and less lucrative, management teams have had to show more skill to produce adequate shareholder returns. AT&T, by contrast, has misspent tens of billions of dollars in flashy but misguided acquisitions, thus digging itself a bigger hole.
Bulls on the company will say that AT&T is getting rid of its bad investments and getting back to its roots. That may well be true. However, given the company’s dismal track record over the past decade, you can forgive analysts for wanting to see the new and improved AT&T actually in action for awhile before buying into the comeback story.
T Stock Verdict
I recently wrote that the Discovery deal was the only reason to be interested in an investment in AT&T. And, sadly, that hasn’t been enough to move the needle. Indeed, DISCA stock continues to trade lower heading into the planned transaction.
I still see a potential path to upside for the new Discovery/Time Warner entity. The assets there seem significant enough to merit consideration. And, notably, key media peer Viacom (NYSE:VIAC) has seen its stock start to behave better in recent weeks after its steep decline. If Viacom can rally, perhaps Discovery should as well.
All that said, it will likely take a few quarters for investors to get amped up about the “new” AT&T story, assuming management is able to execute on its vision. Meanwhile, the uncertainty around the Discovery spin-off is clearly becoming an overhang on the stock. And dividend investors continue to exit T shares given the recent slashing of the dividend. Add it all up, and T stock looks like dead money at least until 2022.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.