For many investors, they have long left AT&T (NYSE:T) for dead. After a few years in a painful decline, T stock was roaring back to life through 2019. From low to high, the stock rallied almost 50% coming into 2020.
Then the coronavirus pandemic happened.
Those who thought they would be safe hiding out in a reliable dividend stock were shocked when T stock fell 33%. The decline essentially matched that of the overall market.
While the world was in a panic and it’s hard to blame AT&T at a time like that, keep in mind that Verizon (NYSE:VZ) saw a decline of just 16.9% during the same stretch from the highs on Feb. 18 to the lows on March 23.
Fast forward more than a year and just when things were turning around for AT&T in mid-May, the stock reversed – hard – falling 15.5% from the week’s high to the week’s low (from May 17 to May 19). The company said it’s going to spin off a key asset and reduce its dividend to unlock value.
Instead, all it did was lose value.
So why then are we looking to buy the stock at $21.25, down about 10% from current levels?
Buying T Stock at $21.25
The truth is, anyone who’s bullish on this name could begin accumulating it now. Shares are currently 32% below the May highs and are down 42% from the late-2019 high. The current dividend yield sits all the way up at 9% and shares trade at less than 7x earnings.
There’s a lot to extrapolate in those observations – and yes, AT&T risks being a value trap – but for me, those risks are being priced in.
Above is a 20-year monthly chart of T stock, which highlights the low from 2008 at $20.90. It is an unadjusted chart, which means it does not adjust for the dividend.
While seemingly unimportant, this creates a drastic change in the charts over a long period of time, particularly for high-dividend stocks.
So what has me looking at the $21-ish area? Have a look.
On the first chart, notice that that’s about where the 2008 low comes into play. While the chart’s low technically sits at $18.85, the $21 area seems like a reasonable area to start nibbling.
Further, on the second chart you’ll see that’s about where the 200-month moving average comes into play. For now, the $22 area is providing some reprieve. If it fails though, the 200-month moving average could certainly be on deck.
The exception to this idea is a rotation higher. Specifically, T stock has suffered from seven straight monthly declines, but is giving us a doji candle in December. That said, it’s still quite early in the month.
The reversal back up through the November low (at $22.55) was enough to get some bulls long.
However, if we finish with this doji-like candle for December and the stock then goes monthly-up, it will be hard to ignore AT&T.
It’s More Than a (Technical) Feeling
There are more reasons to be a buyer of AT&T than just the technicals. In fact, if we were going solely off the technicals, AT&T isn’t one many buyers would want. Instead, there are some fundamental considerations.
First, the company pays a 9% dividend yield at the moment, but that yield will not remain for long. Assuming the spinoff of its Warner Media business – being combined with Discovery Media (NASDAQ:DISCA) – goes through sometime in the first half of 2022, AT&T will begin paying a lower dividend.
Mark Hake did an incredible job breaking down how the spin-off will impact AT&T stock. But based on those expectations, we should still be talking about a 4.5% to 6% dividend yield from the entity that emerges after the deal goes through (assuming it does).
While management’s effort to unlock value has only hurt the stock thus far, it should unlock value in the future. That’s because investors can only let the new Warner Bros. Discovery business trade at a discount for so long versus Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) and other streaming platforms.
Warner is actually a profitable company with solid revenue growth and free cash flow. Further, it has a combined 69.4 million subscribers between its HBO and HBO Max platforms.
The Bottom Line
Investors who don’t want to bother with AT&T can always wait for the Warner Bros. Discovery spin-off and get long that asset on its own.
However, the hope is that AT&T can complete the spin-off and pay a decent yield on its stock, while investors (who will own 71% of the new entity) can have a new stock with better capital appreciation potential.
On the date of publication, Bret Kenwell 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.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.