AT&T’s (NYSE:T) stock performance was unimpressive throughout 2021. This does not come as a surprise. The company has been undergoing a significant business transformation. Therefore, T stock’s poorly performing price in 2021 reflected the uncertainties that surrounded a significantly leveraged AT&T.
However, it seems to me that the stock has discounted the headwinds. At a forward price-to-earnings-ratio of 7.3, the stock is worth considering.
It’s worth noting that T stock touched levels of $22 twice in December 2021. Each time, the stock has strongly bounced back. This might be an indication of bottoming out. Today’s bump in T-stock’s price appears to be evidence of another big bounce back in the making.
Last month, Discovery (NASDAQ:DISCA) announced that the European Commission has granted it “unconditional antitrust clearance” of its merger with the WarnerMedia division. This is likely to serve as a key catalyst for T stock trending even higher from current levels.
With this clearance, there is a high probability that the merger will be completed by mid-2022. AT&T will then be a leaner organization with lower debt. The markets are likely to change their long-term view on the stock’s value.
A post-merger dividend cut by 50% has also impacted stock sentiments. However, considering the potential for free cash flows, T stock will remain an attractive for income investors.
Core Business Growth Is Accelerating
AT&T has made significant investments in the Mobility (Wireless) business in the last few years. This has already started delivering results.
For the third quarter of 2021, the company reported 66.4 million post-paid phone subscribers. A significant rise from Q3 2020’s 63.5 million subscribers. Even Fiber subscribers have been increasing on a sustained basis.
After the demerger of the media division, the company’s focus will be exclusively on their strong communications (Mobility and Wireline) business. Additionally, a deleveraged AT&T will be positioned to further accelerate growth.
Another point to note is that for Q3 2021, AT&T reported free cash flow (FCF) of $5.2 billion. This would imply an annualized FCF of $20.8 billion.
The key point to note here is that the Mobility segment reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $8 billion. Further, the Business and Consumer Wireline segment’s adjusted EBITDA was $3.3 billion. On the other hand, the WarnerMedia division reported adjusted EBITDA of just $2.2 billion.
Therefore, the primary EBITDA and cash flow driver for the company is the Mobility segment. Once the demerger is completed, this division will continue to deliver healthy FCF.
Furthermore, if the core business acceleration (subscriber growth) sustains, there is visibility for cash flow upside. This underscores my view that dividends will again increase in the next few years.
As a matter of fact, AT&T has guided for free cash flow in excess of $20 billion for 2023. The cash flow visibility will provide ample headroom for AT&T to continue deleveraging over the next few years.
Positive Outlook for WarnerMedia
Over the next few years, the WarnerMedia spin-off is likely to be value creating. From a growth perspective, it’s worth noting that HBO Max and HBO subscribers were 56.9 million for Q3 2020. In the last quarter, the number of subscribers swelled to 69.4 million.
Another important point to note is that for Q3 2020, there were 18.9 million international subscribers. In the last quarter, the number of international subscribers increased to 24.2 million. In Q4 2021, HBO Max has launched in Spain and Nordic region. The division plans more international expansion in 2022. This is likely to ensure that subscriber growth remains robust.
Back in May 2021, Discovery chief executive officer David Zaslav opined that the merged company “could reach up to 400 million streaming subscribers.” It seems very likely that content investment will be significantly ramped-up after the merger. Further, aggressive international expansion will help in boosting the number of subscribers. Therefore, there are reasons to remain bullish on the media division.
Bottom Line on T Stock
AT&T has struggled with a debt overload in the past. However, the last year has been transformative with the company announcing or closing $55 billion in asset monetization.
With steady subscriber growth and a leaner organization post demerger, the outlook seems bright for AT&T. It would be unrealistic to expect significant growth acceleration immediately.
However, healthy cash flows, potential dividend upside and deleveraging is likely to keep sentiments positive for T stock.
I therefore believe that T stock is worth accumulating at current levels. The stock is likely to be a market performer in 2022.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
