Target Price: $38
Why Is This Idea Viable?
1. AT&T dividend yield is currently 6.40% per annum, which is quite lucrative. The cash flow is enough to generate $0.52 per share. Over 2019, the cash flow amounted to $29B, with $14.90 paid out as dividends. In 2020, the cash flow is expected at $28B, with virtually no risks of that falling behind the expectations because of the COVID outbreak. Telecommunication companies hardly suffer from any direct influence of the economic instability, as their services are still quite in demand. And it is communications sector that generates the most revenue (78%) and operational profit (76%) for the company. The COVID may lead to smaller amount of retail sales in AT&T stores, but that accounts for less than 9% of its total earnings. John Stephens, the CFO at AT&T, reported during an industry conference held on March 11 that the company's supply chains have no negative influence coming from the COVID matter. AT&T raised its dividend payouts even during the 2008 crisis, and there are no visible reasons for it to stop raising them now.
2. AT&T is doing well in the rising video streaming market, which, in combination with the loyal customer base in the cell communication segment, boosts the overall earnings. AT&T has an advantage over other US telecom companies, such as Verizon and T-Mobile, which lies in the diversified portfolio in media and entertainment industry. This, in particular, allows the company to offer plans with free access to HBO Now. In May 2020, a premium service called HBO Max is schedule for launch, which will be important for the customer base with the above average purchasing capacity. A premium plan combining 5G and access to HBO Max is likely to be launched. The demand for faster internet connection combined with an opportunity to save on video streaming subscription may lead to high demand for this service and, consequently, to an increase in earnings per customer. Technically, AT&T can already provide 5G connection in 90 US cities. Besides, the company may reap profits from streaming services in the times when people are under the lockdown caused by the COVID-19 outbreak.
3. With the Fed having cut the interest rates, it will be easier to maintain debts in the next two years. AT&T has $159B in debts, which is one of the highest across all non-financial corporations. The company's priority is achieving a net debt / EBITDA ratio of 2.00 to 2.25 before 2020, compared to the current figure of 2.50. High financial market volatility may make it somewhat complicated for the company to leverage loans, if for just a short term. This, however, may be avoided altogether in case the buyback is stopped and a significant part of the free cash flow is released. The low interest rates is expected to help AT&T manage the current debt. Overall, the company's loan portfolio is quite acceptable.