Many analysts have been bearish on AT&T (NYSE:T) stock lately because of the change in the company’s structure with a dividend cut included in the regime’s implementation of new strategies.
I’ve occupied a forward-looking approach with my analysis, in which I believe the Warner Media spinoff and current statistical dividend metrics could jointly translate into AT&T becoming a future dividend powerhouse once more.
I’d like for readers to consider this perspective as a piece of the puzzle instead of the only variable to base their investment decisions on. Nonetheless, I do believe it could be a catalyst in determining AT&T’s future shareholder value distribution.
Warner Media’s Possible Effect
AT&T will reportedly own 71% of Warner media after splitting off 29% to Discovery (NASDAQ:DISCA, DISCB, DISCK). Under U.S. GAAP accounting laws, a subsidiary is recognized as a business combination when the parent company owns more than 50% of the entity. Therefore, Warner’s assets, liabilities, revenues, and expenses will be reported in full on AT&T’s financial statements, with the 29% that isn’t owned by AT&T still being reported but under a non-controlling interest account.
So, how does this play into AT&T stock? Well, Warner Media is showing robust growth, having produced fourth quarter revenue of $9.9 billion, translating to 15.4% annual growth. Looking forward, Warner Media’s expected contribution for 2022 is $37 to $39 billion in revenue, $3 billion in cash flows, and $6 to $7 billion in EBITDA.
Furthermore, AT&T is expected to receive $43 billion in cash, which could help the firm pay down some of its debt. AT&T’s leverage ratio is currently running hot at 113.49%, which has diluted shareholders’ residual in recent times, and a fresh injection of cash wouldn’t cause a blank slate but will certainly provide some breathing space.
In one of my previous articles, I mentioned that AT&T has chosen to streamline its business operations in a push for 5G market share, which has caused the company to halt increases in dividend payments. Before cutting its quarterly dividend by 47% in May last year, AT&T was viewed as the ultimate dividend aristocrat with one of the most favorable dividend yields.
I believe that the cut is transitory and that we could see a mean reversion within the next few years. AT&T wouldn’t struggle to distribute higher dividends if it wanted to, but it instead seems like a case of ensuring that it leaves enough fuel in the tank while going through a transitional period. To expand on this, the stock’s dividend safety ratios are looking great, with its cash dividend payout ratio trading at a 5-year discount worth 59.43% while its current dividend has a coverage ratio of 1.68, which is 4.12% higher than its 5-year average.
Furthermore, AT&T’s Return on Shareholders’ Equity (ROE) of 12.12% is trading at a 25.83% premium to its 5-year average, conveying that investors’ residual values are as healthy as can be. The ROE also signals that the firm is managing its operating expenses well in the wake of inflation, which is a rarity among most companies amid an inflation backdrop after covid-19 induced stimulus.
What Now for T Stock?
It’s not worth discussing dividends if a stock is in poor shape and could lose value in the market. I thought it best to cover AT&T’s market prospects for the foreseeable future. AT&T is a mature stock with bargaining control over its suppliers and pricing power over its consumers.
I think the stock bodes well with the current risk-off attitude, which could see investors edge towards safety. Simultaneously, T stock is significantly undervalued relative to its fair value with its price-to-earnings and price-to-sales ratios trading at discounts relative to their 5-year normalized averages.
I believe the financial markets could avoid overreacting to the Russia-Ukraine conflict, but will still tread cautiously, which could play into AT&T’s stock gains.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.