For those who haven’t heard, the new AT&T (NYSE:T) stock will be pretty much the same as the (very) old T stock. Specifically, the conglomerate will soon, for the most part, very much resemble the AT&T that existed a few years after the turn of the millennium.
After AT&T splits from its Warner Media unit, the company will get the majority of its revenue from its mobile phone business, while its financial results and valuation should be rather attractive. The conglomerate is slated to spin off Warner Media next quarter.
And, for the reasons I’ll explain below, the spinoff will make T stock a pretty good place for conservative investors to hide during the market’s current correction.
AT&T’s Core Business Looks Strong
The number of AT&T’s postpaid phone subscribers increased 5% year-over-year (YOY) in the fourth quarter to 67.3 million, and it added a net total of 884,000 such subscribers versus the previous quarter. It also gained 271,000 net fiber subscribers in Q4.
The conglomerate’s overall Q4 earnings per share (EPS), excluding certain items, came in at 78 cents, up from 75 cents during the same period a year earlier. It generated $8.7 billion of free cash flow last quarter and $26.8 billion of free cash flow for all of 2021.
For 2022, AT&T expects free cash flow of $23 billion, EPS of as much as $3.15 and a low-single-digit-percentage revenue gain. That guidance includes the impact of the Warner Media spinoff.
Moreover, AT&T will obtain $43 billion of cash as a result of the spinoff, most of which it will likely use to cut its massive debt load. As of the end of Q4. its net debt stood at $187.45 billion. Assuming, however, that it will use all of the proceeds from the spinoff to pay down its debt, its net debt-to-EBITDA ratio, based on last year’s EBITDA of $56.75 billion, will come in at a manageable total of about 2.5.
Post-Spinoff AT&T Should Be Relatively Resilient
In Q4, nearly all of AT&T’s revenue, excluding Warner Media, was derived from its mobility, business wireline and consumer wireline businesses. Moreover, mobility’s operating income (OI) was $5.4 billion, while the conglomerate’s total OI came in at $5.3 billion.
The mobility, business wireline and consumer wireline businesses have no direct overseas exposure, so they will not be tremendously affected by Europe’s problems.
What’s more, I don’t think the vast majority of Americans will respond to higher gas prices and inflation by reducing the amount they spend on smartphone plans and services. That’s because, for most American consumers wealthy enough to have postpaid smartphone subscriptions, those subscriptions are seen as necessary rather than a luxury.
The same goes for business spending on communication and consumers’ outlays on internet service, which accounts for nearly all of the consumer wireline business’ sales.
Meanwhile, the conglomerate’s forward price-to-earnings ratio, based on the high point of its 2023 EPS guidance, is just 7.7x. That’s extraordinarily low, and stocks with low P/E ratios tend to perform relatively well during market corrections.
Also importantly, the dividend yield of T stock — based on its planned, post-spinoff dividend payout of $1.11 per share — is 4.7%. So even if shares do dip during the market’s correction, the stock’s owners will have a “cushion” of nearly 5% to offset any losses. Investors will be, as the expression goes, “paid to wait” for a rebound by the market and AT&T’s shares.
The Bottom Line on T Stock
In the wake of the spinoff of AT&T’s Warner Media unit, the company will generate nearly all of its revenue from highly resilient businesses that have very low cyclicality. Meanwhile, its valuation and dividend yield will both be very attractive.
Its profitability is likely to keep steadily increasing, and its dent will reach manageable levels. Consequently, T stock is an excellent name for defensive, conservative investors to own at this point.
On the date of publication, Larry Ramer 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.
