What if I told you there was a stock that offers a ~6-7% dividend AND has potential for revenue growth, is that something you would be interested in? That company is AT&T (T) and we’ll break-down some opportunities & challenges this cash-generating machine faces in the mid-to-long term.
The Overview
AT&T has three business segments: Communications, Warner Media, and Latin America. AT&T’s communications segment contributes ~79% of operating revenues and ~80% of profits. AT&T’s recent acquisition of Warner Media adds to AT&T’s development, production, and distribution capabilities. The Warner Media acquisition has been broadly successful, comprising 17% of AT&T’s revenues and 22% of profits. Warner Bros. is one of the largest TV and film studios globally, remains a media powerhouse with a profound content library that reaches audiences across many platforms.
In this day and age huge “value” is seen in the amount of users or customers a company has reached. A quick glance at Zoom and we can see that a large portion of their value comes from the 300 million users they leverage. Coming back to AT&T they have over 170 million customers across numerous products to go along with a broad array of content rights.
HBO Max
One of AT&T’s biggest risks over the next 5 years comes from their acquisition of HBO Max. Main concerns are over whether or not they can retain or grow the service’s subscriber base and ultimately increase earnings. Management has recently increased expectations of the HBO Max subscription base to reach between 120 to 150 million subscribers by 2025, which is up from their relatively conservative estimate of 75-90 million in 2019. Here’s a look from their recent earnings presentation
AT&T is progressing in its postpaid wireless, and HBO Max segments, which saw ~800k lines and an additional ~3.5M subscribers added in their previous two quarters. Consumers are willing to spend more on high-quality internet service as work from home continues.
Final Thoughts
When we look at AT&T’s share price over the last 10 years and we see the stock is up roughly 10% during that time-period it doesn’t necessarily instill confidence as a profitable investment. Some might argue why purchasing shares of AT&T would be a better investment than a “more secure” bond play. However, it is our opinion that AT&T is at a turning point and we may now be able to see the best of both worlds, a high yield dividend return, as well as steady growth in revenues.
A 5% return per annum, paired with its high dividend yield of ~6-7%, allows AT&T to remain more attractive than treasury bonds even with the associated risk of holding shares. Despite increased debt levels and decreased credit ratings, AT&T has a strong strategy to reduce its debt burden. AT&T should continue to have a dividend payout ratio at roughly 50% of FCF, acting as a bond proxy in an investor’s portfolio.
Positions Disclosure: It can be assumed the author of this article has a long position in the stock.
Submitted May 16, 2021 at 08:07AM by TheStonksHub https://ift.tt/3eN8iJg
