In hindsight, it appears that I was too bearish on AT&T (NYSE:T). In my last article on T stock, which was published on Dec. 17, I argued that, although it was oversold, it was poised to head lower in the near-term because of bearishness about its planned dividend cut
But in recent weeks, the shares of the telecom company, which is in the process of spinning off its media assets, have climbed. Instead of dropping below $20 per share, like I anticipated, Ma Bell is back above $26.
However, even as AT&T appears set to continue to climb, its recovery may start to stall. The reason for that is, while the conglomerate has underlying value that can be unlocked, it’s going to take time for that to happen.
The shares can advance in the long-term. Yet in the next few months, as investors generally revert back to a more “show-me” approach, the shares could deliver a more mediocre performance.
So only buy T stock now if you’re patient enough to wait for its next (possible) big surge higher.
Why T Stock Has Made a Comeback
Why has AT&T all of a sudden spiked higher after its extended decline for much of last year ? It depends on whom you ask. Some point to increased awareness of the deep value of the stock. And the firm has benefited from some positive news; for example, its new 5G service is poised to be launched soon.
However, the performance of T stock over the past few weeks may not have been caused by a shift in investors’ sentiment towards the company. At least, that’s the view of analyst Craig Moffett of MoffettNathanson.
According to Nathanson, the end of tax-loss selling, plus the rotation from growth to value, has pushed the shares back above $25. Sure, at the end of the day, the reason for its big rally isn’t what matters; what’s most important to investors today is whether its surge can continue.
In the view of AT&T’s bulls, upcoming events, like the planned combination of AT&T’s WarnerMedia unit and Discovery Inc. (NASDAQ:DISCA), will help move T stock to a price that’s more in sync with its underlying value. Bullish investors may also believe that, after Warner Media is spun off, the “new,” telecom-only AT&T will look cheap, helping its stock rise.
But that scenario may not play out. Instead, as it becomes more clear that it will take time for AT&T’s value to be unlocked, T stock will likely soon start trading in a tight range.
The Market Will Soon Revert Back to a “Wait-and-See” Approach Towards AT&T
AT&T and the post-merger Discovery have a lot of untapped potential. It may, however, be awhile before the companies improve enough to justify a move higher by their stocks .
After its reverse merger, Discovery is going to be cheap, but investors will likely continue to take a “wait-and- see” approach with it. Because the market remains unsure whether “old media” companies can successfully adapt to the streaming revolution, a “wait-and- see” scenario has played out with similar names like ViacomCBS (NASDAQ:VIAC).
As for AT&T’s core telecom unit, right after the spinoff and dividend cut, it will likely appear to be reasonably priced. According to Barron’s, in the wake of the spinoff, AT&T’s annual dividend per share will fall from about $2.08 to around $1.10.
Including the post-merger Discovery shares that the owners of T stock will receive, Barron’s estimates that the effective yield of T stock at today’s prices will be in the ballpark of around 6% when WarnerMedia is divested. With that yield, the stock will have a slightly higher payout than its peer, Verizon Communications (NYSE:VZ), which has a 4.76% yield. As investors internalize the idea that AT&T’s comeback is a work in progress , the stock’s recent rally will start to wane.
The Bottom Line
With its double-digit percentage move higher in recent weeks, AT&T’s shares may have given the impression that their recovery is well underway. While that may be true, I wouldn’t assume that T stock will continue to climb at a similar pace.
The Street was overly pessimistic towards AT&T for much of 2021. Yet with the second part of AT&T’s turnaround still in its early stages, large investors will want to wait for more data before they bid the shares of AT&T higher.
So AT&T can climb further, but its owners may have to wait awhile for further, meaningful gains.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
