Image Shown: The blue line represents the share price performance of AT&T Inc and the orange line represents the performance of the S&P 500 Index. Shares of T have outperformed the index on a year-to-date basis as of this writing.
By Callum Turcan
One of our favorite high yield ideas out there is AT&T Inc (T) — ~5.6% yield — given its stellar free cash flow profile and ongoing corporate initiatives: serious debt reduction, share buybacks, upcoming launch of HBO Max, the rollout of 5G services across the US, cost structure improvements, and upside from AT&T’s public-private partnership FirstNet (billed as the first nationwide network in the US dedicated to entities/groups operating within the realm of public safety i.e. first responders like law enforcement, firefighters, and emergency medical services providers). On March 3, AT&T provided an update on some of its recent initiatives, news that has offered resiliency to shares.
Share Buybacks
For starters, AT&T announced it had signed a definitive agreement with Morgan Stanley (MS) to retire $4.0 billion of its common stock under an accelerated share repurchase (‘ASR’) agreement. Please note that AT&T had signed a different $4.0 billion ASR agreement that was announced back in December 2019, which when announced was expected to retire ~100 million common shares in the first quarter of 2020. The second ASR is expected to begin in April. Here’s what AT&T’s press release had to say:
AT&T has said it intends to use 50% to 70% of free cash flow after dividends to retire about 70% of the shares it issued to fund the acquisition of Time Warner — now WarnerMedia — by the end of 2022…
The two ASRs, combined with open market repurchases, are expected to bring total common shares retired in 2020 to more than 250 million through April, depending on market conditions. The company will provide an update on its share retirement program when it releases first quarter results on April 22, 2020.
We appreciate the program as shares of T trade at a modest discount to our fair value estimate of $40 per share with room for upside (the top end of our fair value range estimate sits at $48 per share). Part of this plan involves using “excess” free cash flow (free cash flow after fully covering its sizable dividend obligations), and part involves AT&T changing is capital stack somewhat. The firm issued $4.0 billion in preferred shares recently, and more broadly, management wants AT&T’s capital stack to include a modest amount of preferred equity and a lot less debt and common equity. We covered that strategy in detail through this article here, which also covers AT&T’s full-year 2019 performance in great detail on both a financial and operational basis.
Upcoming Catalysts
Looking now at AT&T’s operational updates, the firm noted it had rolled out 5G coverage to 80 million people in the US (at the end of February) and by the end of the second quarter, AT&T aims to have nationwide 5G coverage. That coincides with the launch of AT&T’s HBO Max offering, a premium streaming service that leverages the firm’s Time Warner acquisition, which is set to go live in May 2020.
By pricing HBO Max at the same level of its existing HBO offering ($14.99 per month), initially, AT&T hopes to convert 10 million existing HBO subscribers (those that will be offered “immediate access to HBO Max at launch”) over to its HBO Max offering. Over time, that price point will likely shift upwards, keeping in mind AT&T is both creating original content for HBO Max and having popular shows like Friends be exclusively available on the streaming service. Furthermore, HBO Max will include the upcoming Friends reunion show to drum up interest in the name as that will also be exclusive to HBO Max.
As it relates to its wireless operations, subscriber additions at FirstNet along with the rollout of 5G is expected to grow AT&T’s wireless services revenues by 2% in 2020. Additionally, AT&T has located 10 categories of cost cutting initiatives that could result in “double-digit billions of dollars in gross savings over the next three years”, which we really appreciate. Finally, AT&T remains committed to deleveraging the balance sheet and continues to target a net debt-to-adjusted EBITDA ratio of 2.0-2.25x by the end of 2022, down from 2.5x at the end of 2019.
Concluding Thoughts
Shares of T have held up relatively well during these turbulent times, and we continue to like the name as a high quality high yield play with room for upside via revenue growth and cost structure improvements. At the end of 2019, AT&T pushed through a modest per share dividend increase as well (~2% sequentially), which we appreciate. We’ll have more to say on the name when AT&T publishes its first quarter earnings report next month.
Telecom Services – BCE CTL EQIX FTR S T TMUS VZ VOD
Media Entertainment Industry – CNK DIS IMAX ISCA LYV MSG NFLX NWSA SIRI
Media (CATV) Industry – AMCX CMCSA DISCA DISH VIAC
Related: TEF, SPY
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Callum Turcan does not own shares in any of the securities mentioned above. The Walt Disney Company (DIS) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. AT&T Inc (T) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.